An opinion of value is an informed, practical estimate of the range a buyer might pay for your business, meant to help you decide what to do next. A formal valuation is a documented, defensible report that a third party such as a lender, court or tax authority can rely on. Most owners exploring a sale need the first before the second.
If you have started wondering what your business is worth, you have probably noticed that the word "valuation" gets used for very different things. Some are a conversation. Some are a thick report with a signature on it. The difference matters, because paying for the wrong one wastes money, and relying on the wrong one can mislead you.
This post explains what each one is, what it is for, and how to tell which one your situation calls for.
What an opinion of value is
An opinion of value is an estimate. Someone who understands how small businesses change hands looks at your numbers, asks questions about how the business runs, and gives you a likely range.
It usually draws on:
- Your financial statements, especially the earnings a new owner could expect to take home.
- Adjustments for things that would not continue under a new owner, such as your own salary above market rate or one-off expenses.
- Your industry and size, because buyers price a stable service business differently from a project-based one.
- Risk factors a buyer would weigh: customer concentration, dependence on you, the state of your records.
What you get back is a range and the reasoning behind it, often in a conversation rather than a document. It is brief. It is often free. And it is honest about what it is: a starting point for your own decision, not a number anyone else should rely on.
That is its strength. You are not paying for defensibility you do not need yet.
What a formal valuation is
A formal valuation, sometimes called an appraisal, is a structured piece of work. A qualified valuation professional follows a recognized method, gathers supporting evidence, documents every assumption and writes a report that stands up to scrutiny.
It typically includes:
- A defined standard of value, such as fair market value, stated up front.
- More than one valuation approach, reconciled into a conclusion.
- Detailed normalization of your financials, with each adjustment explained.
- Supporting research on your industry and the broader economy.
- A signed conclusion, with the scope and limits of the work spelled out.
Because it is written for someone else to rely on, it takes longer and costs meaningfully more than an opinion of value. How much depends on the size and complexity of the business and the purpose of the report, so ask for a quote tied to your specific need.
The real difference: who relies on the number
The cleanest way to choose is to ask one question: who has to rely on this number?
If the answer is only you, because you are deciding whether to explore a sale, an opinion of value is usually enough.
If the answer is someone else, you likely need a formal valuation. Common examples:
- Tax filings, including gift and estate planning, where the number may be reviewed.
- Lending, when a bank needs support for a loan secured by the business.
- Legal disputes, including shareholder disagreements and divorce proceedings.
- Partner buyouts, where two sides need a number both can accept as fair.
- Employee ownership plans and other transactions with formal reporting requirements.
In each of these, the number has consequences beyond your own choice. It has to hold up when someone questions it.
Why neither one is a sale price
Here is the part that trips owners up. Neither an opinion of value nor a formal valuation tells you what your business would sell for.
A valuation, of either kind, estimates value under stated assumptions. A sale price is what a real buyer agrees to pay, on real terms, at a real moment. Those can differ for many reasons:
- A particular buyer may value something about your business more than the market generally would, such as your location or your customer list.
- Terms change the picture. How much is paid at closing, how much later and under what conditions all affect what a price is really worth to you.
- Timing and buyer supply change. The same business can draw different interest in different conditions.
So treat any estimate as a guide to whether it is worth finding out more, not as a promise. The only way to learn what buyers will actually do is to put the business in front of them. We cover that in how to test the market before you commit to selling.
When an opinion of value is the right first step
For a curious owner who is not in a hurry, an opinion of value fits most situations:
- You want to know whether a sale is even in the range you would consider.
- You are weighing whether to sell now, in a few years or not at all.
- You got a number from somewhere and want a second, reasoned view.
- You want to know what a buyer would focus on before you start fixing things.
It is also a good filter. If the likely range is far from what you need, you have learned something important without spending much. If it is in range, the next step is usually to find out whether buyers agree, not to commission a report.
Before any of that, it helps to know what buyers look at first. Our post on whether your business is sellable walks through the signals that move a buyer's view of value.
When to pay for a formal valuation
Pay for the formal work when the purpose demands it. A few practical tips:
- Name the purpose up front. The standard of value and method depend on why you need it. A report for estate planning is not written the same way as one for a partner dispute.
- Choose a qualified professional. Look for someone with recognized valuation credentials and experience with businesses of your size and type.
- Ask what you will receive. A full narrative report, a summary or a calculation are different products at different prices.
- Keep it in its lane. A formal valuation written for tax purposes is not a listing price, and showing it to buyers can anchor a negotiation in ways you did not intend.
If you are both planning a sale and have a separate need for a defensible number, it is fine to have both. They answer different questions.
Where the two meet in a sale
In practice, owners who sell a small business usually go through something like this:
- An opinion of value to decide whether a sale is worth exploring.
- Testing the market, so real buyers respond to real materials.
- Buyer offers, which show what the market will do on specific terms.
- Due diligence, where a buyer checks your numbers. The buyer's lender may commission its own valuation at this point, which is one reason clean records matter.
Notice that the formal valuation, if it appears at all, often comes from the buyer's side, not yours.
How SimpleExit fits
A free opinion of value is part of every SimpleExit consultation. We look at your business, answer your questions and give you a likely range, and we are clear that it is an estimate, not a formal valuation or a promised price. If you then want to see what buyers actually think, SimpleExit prepares the materials, lists the business and collects NDAs for a $10,000 flat fee, and you run every conversation. You can see the steps on how it works.
The short version
- Opinion of value: a brief, informed range for your own decision. Often free.
- Formal valuation: a documented, defensible report for when someone else relies on the number.
- Sale price: what a buyer actually agrees to pay. Neither estimate can promise it.
Start with the question of who needs to rely on the number, and the choice usually makes itself.
If you would like a reasoned estimate for your own business, with no obligation afterwards, book a free consultation and we will walk you through it.