Two valuations four hundred thousand apart

The situation

A manufacturing business reported seller's discretionary earnings of $750,000, and the business broker running the sale process produced an informal opinion of value of $2,850,000, applying a 3.8x multiple broadly in line with the illustrative ranges deavo publishes for the sector — see deavo's valuation guidance, which lists a 3.6x median for manufacturing, explicitly labelled “illustrative medians for research context only…not an appraisal.”

The problem

A minority shareholder in the target company, uncomfortable relying on a broker's informal opinion for a transaction that would cash him out, insisted on a formal report from a Chartered Business Valuator before agreeing to the sale. The CBV Institute's Valuation Practice Standards — Practice Standards 100, 110, 120 and 130, covering valuation conclusions and reports, report disclosure, scope of work, and file documentation — are, in the Institute's own words, “effective for independent valuation engagements beginning on or after January 1, 2026.” See the CBV Institute's practice standards page. They bind the Institute's members on an engagement of this kind; the broker's opinion was under no equivalent obligation.

The numbers

Working from the same $750,000 reported SDE the broker had used, the CBV's scope of work under Practice Standard 120 required normalizing out a $50,000 add-back the underlying documentation could not support, bringing maintainable earnings to $700,000. The valuator then applied its own declared capitalisation multiple of 3.5x — a figure specific to this engagement's risk assessment, not a published benchmark — producing a formal value of $2,450,000. Against the broker's $2,850,000 informal opinion on the identical business, the two figures landed exactly $400,000 apart.

The rule that decided it

The gap traces to two different things: a documentation standard and a methodology choice. The CBV's Practice Standard 120 scope-of-work obligation required testing every add-back against supporting evidence before including it in maintainable earnings, which the broker's informal opinion had no equivalent obligation to do. Separately, the CBV applied its own capitalisation multiple rather than deavo's illustrative sector median. It is worth being precise about what the standards do and do not settle: Practice Standards 100, 110, 120 and 130 govern valuation conclusions and reports, report disclosure, scope of work and file documentation — they do not prescribe a valuation method, so the choice between a capitalised-earnings approach and a full discounted cash flow analysis (see the discounted cash flow glossary entry) remained the valuator's, and this engagement used capitalised earnings. Neither multiple is more “correct” in the abstract; the CBV's is the one prepared to a documented, inspectable standard a court, a lender or a dissenting shareholder can actually test.

The outcome

The parties settled on the CBV's $2,450,000 figure as the transaction price, with the minority shareholder's agreement secured on the strength of a report he could independently verify rather than an informal opinion he had no way to test. The broker's $2,850,000 opinion was set aside as a starting point for negotiation, not a number either side treated as binding once a formal report existed. See the Chartered Business Valuator glossary entry for what the designation itself certifies, and, for the related file where a purchase price allocation dispute turned on a similarly unsupported figure, goodwill allocation the vendor could not accept.

What it would have cost otherwise

Closing on the broker's $2,850,000 opinion without a formal report would have left the minority shareholder's consent resting on a figure built partly from an add-back that could not survive documented scrutiny — a foreseeable dispute, and a foreseeable challenge to the sale itself, rather than a closed transaction. The cost of commissioning the CBV report was a few weeks of delay and the valuator's own fee; the cost of skipping it would have been a $400,000 valuation gap left unresolved until a dissenting shareholder, a lender or a court forced the question later, on worse terms than a voluntary engagement offered.

The tell

The tell was the $50,000 add-back itself: a figure that inflated the broker's informal multiple base but could not survive a documented scope-of-work review. Any valuation gap this size, on the same underlying business, should prompt the same question the minority shareholder asked here — not which number is bigger, but which one was actually tested against the standard a professional designation requires.

Takeaways

• • A CBV report prepared under the Institute's Practice Standards (effective 1 January 2026) carries documentation and scope-of-work obligations an informal broker opinion does not.
• • The $400,000 gap here traced to a disallowed add-back plus a different declared capitalisation multiple — both individually defensible, both producing very different totals.
• • A minority shareholder, lender or court is far more likely to accept a value it can independently test than an informal opinion it cannot.
• • Commission the formal report before a dispute forces the question, not after.

Sources

• • CBV Institute — practice standards — Valuation Practice Standards No. 100 (valuation conclusions and reports), 110 (report disclosure), 120 (scope of work) and 130 (file documentation), “effective for independent valuation engagements beginning on or after January 1, 2026.” They govern reporting, disclosure, scope and documentation — not the choice of valuation method.
• • Deavo — valuation guidance — the 3.6x median for manufacturing and production that the broker's 3.8x multiple sat near, published as “Illustrative medians for research context only — individual businesses vary widely. Not an appraisal.”
• • Treadstone Law — formal valuation versus a broker's opinion of value — confirms the distinction this file turns on: a broker's opinion is faster and market-focused, while a formal valuation by a Chartered Business Valuator carries documented methodology and is defensible under scrutiny, and is the right choice where co-owners or tax positions are in play. It does not cover the practice standards themselves or a minority shareholder's right to demand a report.