6 MOST COMMON MISTAKES IN BUSINESS VALUATION

As a business specialized in business valuation, we have faced numerous mistakes in valuation reports on the market. We want to list and share the most important mistakes that have a huge impact on valuation.

1)

Incorrect Weighted Capital Cost in Discounted Cash Flow valuation methodology;
Incorrect identification or incorrect formulation of indicators such as Beta coefficient, risk-free return, country risk, business asset allocation, tax structure, etc. prevent correct company value calculation.


2)

Using the same multiplier for business with different size;
This is one of the most common mistakes in the company valuation process. Valuation experts accept multiplies as valid as business data in any sector can easily be obtained from the stock market and overlook volume premium. Correct application is to discount this data and supplying share transfer agreements that are not open to the stock market. Two businesses must be assessed with different multipliers even though they are in the same sector. Maturity level (early stage, growth, and maturity) of the business can impact the multipliers and vale.


3)

Overoptimistic view for future projection based free cash flow assumptions;
This is one of the most common mistakes even by the biggest players in the sector. Although the past 5-year performance of a business is limited, fast growth and high margin models are formulated for the future. It is possible to find reasons to be optimistic. But over time, the plans do not work as expected and it is possible to face with excuses. This approach will mislead investor expectation and lead to performance-based earn-out for current shareholders.


4)

Failing to pre-audit (edit) business financials;
Another important mistake we experience is using raw financial data of businesses in company valuation. Business must be organized for real assets and debts in case of any activity termination subjected to asset and resource updates.


5)

Business valuation based on future cash flow value;
One of the important misconceptions is about calculating company valuation based on future free cash flow. Yes, future cash flow will be a determinate of investor profit. However, book value and multipliers of similar businesses should be included in valuation as much as future predictions.


6)

Company valuation based only on financial data;
This might be the most important mistake. Business is a dynamic being and it is more than just numbers. Can businesses in the same sector with the same turnover and profit have the same value? A valuation reports without considering large customer dependency, single boss management and innovation will not give the correct results.


VALURA will continue to be the first choice of shareholders/investors who wants to learn the most accurate company value with extensive company valuation experience, award-winning software and unique methodology.


Gökhan Acar / CEO
VALURA

 
 
 
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