What is the primary goal of valuation when considering a business sale?

The primary goal of valuation in the context of a business sale is to establish a fair market value. Valuation serves as a critical process in determining what a business is worth objectively, based on various factors such as the business’s earnings, the market conditions, and comparable sales in the industry. Having a fair market value allows both the buyer and the seller to have a rational basis for negotiations, facilitating a smoother transaction process.

By establishing a fair market value, the seller can understand what price is realistic and achievable in the current market, while buyers can assess whether the investment aligns with their financial strategies. This process also helps in identifying the intrinsic value of the business, which can also consider future growth potential and risks.

Other considerations in business valuation, such as maximizing asset liquidation or estimating dividends, serve specific purposes but do not directly align with the overarching goal of arriving at a price that reflects the true value of the business in the marketplace. Determining an average market price may also be useful, but it doesn't provide the nuanced and detailed evaluation that a fair market value does, which is tailored to the specific characteristics and context of the individual business being evaluated.