Business valuation is highly important for large business owners that can be a deciding factor to sell, continuing, or even adjourning a project. Figuring out the business valuation is a complex task and different methods can be used for it. If a business owner plans to sell or transfer their business, then figuring out the right value without valuation mistakes is extremely important. A professional business valuation performed by an authorized specialist, based on accurate valuation, can give maximum financial returns for the business owner.
Here are six top valuation mistakes you must avoid when determining your business worth.
1. Having unrealistic expectations
It is commonly observed that business owners have an optimistic view of their business value. Unrealistic expectations about cash flow or future earnings, lack of knowledge about how companies are valued, or a poor understanding of buyer needs for their company can be the reasons for it.
As a result, business owners can end up questioning the results of an outside business valuation. Also, Business owners may feel that the valuator does not believe in them if they have unrealistic expectations about their company’s value or its future growth.
At the very same time, buyers may also have unfeasible expectations about a company’s value. For example, they might be prepared to pay a premium for the business because of expected synergies, but buyers frequently underestimate the costs of an ownership transformation and overestimate savings from the merger.
2. Not sharing information
Whenever you hire a business valuator, you must share detailed information about the company and work cooperatively. Some business owners may not feel easy to reveal confidential information, But providing all the necessary information is important for a realistic business valuation and to avoid valuation mistakes.
Also, the valuation process involves more than just giving numbers and waiting for a valuation figure. The valuators need to meet key company members, make on-site visits, and ask follow-up questions to better understand the business.
3. Trying to do your own valuation
As Business valuation is a complicated process that can involve different methods and levels of assurance and complexity. The selection of valuation approach depends on the transaction, type of company, and available information.
Valuation mistakes could be possible when business owners or entrepreneurs trying to figure out a company’s value without the help of an authorized and competent business valuator. Some common mistakes are:
- Abruptly mixing valuation methods.
- Using the net book value of the company’s assets rather than using fair market value.
- Making unrealistic presumptions in cash flow projections.
- Using an inappropriate business valuation method that is not suited to the type of business or cash flow stability.
- Disregarding the changing sales trends.
- Fail to consider ownership transition capacity.
4. Expecting a fixed value
Business valuation is not a perfect science and may contain valuation mistakes. Your valuator is not expectedly to give you one accurate value for the business or company that everyone in the market will accept. It is a common misconception that valuation gives an accurate value.
Valuators generally offer a suitable price range that the company would possibly sell. That means a buyer who does not have a sound reason to pay lower or higher than the fair market value. For example, a family member of the business owner may be able to get a lower price. As a result, you can expect a different range for smaller businesses and companies in certain areas, such as technology.
The valuation also gives a mirror image of the company’s stand-alone value. That means the company’s value without any strategic consideration and potential synergies from the buyer. It’s common that this figure can be different from the final price. The price can be contrived by different factors such as:
- Due assiduity.
- Available financing.
- The buyer’s expected synergies or strategic interests
- The owner’s impatience to sell.
- The business capacity to smoothly adapt to new ownership.
Also Read:
Best practices for cash flow forecasting
5. Expecting valuation to stay the same
It is common for business owners to falsely assume that a business valuation will remain valid over a long time. This can cause huge conflict among business owners. For example, the family members of the owner may become upset if the business is sold and its value eventually rises after the business is sold out.
In fact, a company’s sell-out value can change for different reasons, including sales trends, market conditions, and new rules.
6. Valuations not performed by a qualified professional
A proper business valuation includes different complex variables that must be considered. If a business valuation is not performed by a qualified professional, the probability of inaccuracies and mistakes increases significantly. Although many CPAs and business brokers offer business valuation services, they are not likely to have the expertise, experience, and depth of knowledge as valuation professionals have, and thus chances for valuation mistakes are higher.
It is necessary that the valuator hired to do the valuation is expert in his knowledge and skills. The art of business valuation is dynamic and continually changing. A valuator must be aware of new rules and guidelines regularly emerging from court cases and IRS pronouncements to avoid valuation mistakes. There are always new risks that need to be considered in valuations. For example, there is a high risk of cyber-data cracking that could be fatal to the value of a business.
It has been observed in history, that valuations for private companies have used traditional business valuation methods. Valuators of public companies have been more innovative in their ways of different businesses and industries visualization, which has evolved into new methods that can be considered for certain private companies.
