How to Avoid Mistakes in a Business Valuation

A business valuation is a process where the true economic value of the business is estimated through a series of mixed methods. The ultimate goal of a business valuation is to know the true value of the business and then use that information for various purposes. Complexity in the process of a business valuation is inevitable, but there are tricks that can significantly reduce the manifestation of error patterns.

Let’s start by defining some crucial methodologies used in business valuation. Business valuation methods

Professionals divide methodologies into two main approaches:

1. THE DCF method (discounted cash flow) is based on the reduction of future cash flows derived from the company’s business plan or prepared by a financial analyst

Download the Excel template! Learn even more ⟶ DCF Calculator Model

1. Trading multiples Or simply multiples based on the company’s comparable transactions.

The financial community has generally accepted the DCF approach. Accounting professionals practice stock market multiples more. Generally, the purpose of the business valuation and the nature of the market will determine what type of valuation approach will be used. For example, one approach is more suitable for an economic and accounting environment, and the other is suitable for those for whom the valuation is carried out.

Top 3 Business Valuation Mistakes and How to Avoid Them

The superficial behavior of a financial analyst causes some of the biggest mistakes in business valuation. Using market forecasts as the basis for evaluating and calculating the growth rate of the business creates an unrealistic image.

With that in mind, here is a list of the top three mistakes made in business valuation:

Valuation based on accounting profits instead of cash flows

When measuring business value, you should always rely on your business earning power. In other words, your cash flow should be your guide, not the bottom line. For this reason, consider using Net Cash Flow or Seller’s Discretionary Cash Flow.

The estimation of these two ratios is done by converting your income statement and balance sheet:

1. Using wrong multiples for valuation.
2. Risk assessment failed.

Be careful with this one! Business valuation usually goes wrong because of this rookie mistake. There are many multiples for assessing the value of businesses. They all represent the specific rate of financial performance and directly determine the potential sale price of companies. Apply these valuation multiples with caution and remember that I never use multiples based on cash flow on a company’s net income. Basically, risk assessment is at the heart of business valuation.

Be very alert when performing risk calculations for your business. Many use capitalization or discount rates that do not reflect the real risk profile and lead to false results. Research thoroughly, know your business health very well, and then create the risk profile. Finally, your discount and cap prices are unique to your business. Appreciate deadly mistakes.

Download the Excel template! Learn even more ⟶ DCF Discount Cash Flow Calculator

Follow the goal!

If you want to develop a quality business review, remember to take your time. Analyze your business in detail, get accurate information and choose your most suitable method. Remember, keep in mind the purpose of your business review.

Sometimes you can’t do it on your own, and there’s nothing wrong with that. If you think you lack the necessary expertise or experience, you can always find quality personnel in the market. We can always help! Our team of professionals can come in and help. Do not hesitate to Contact us here!

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