Common mistakes related to Business valuations

Article explains Common mistakes related to Business valuations committed by Business owners which includes Non-taking the valuation for ongoing Business, Valuation at the Eleventh-Hour, Valuation by Unqualified and inexperienced Valuer, Hiring a Valuer not having Knowledge of the valuation Field, Lack of proper Due Diligence, Insufficient Data Gathering and Analysis, Errors in Valuation Report Presentation etc.

Covid-19 was the biggest challenge that the world has faced. Number of businesses have lost their existence, number of businesses sold to another Business Houses being unable to survive and the number of businesses phased slowness and needed further capital, to support and to stand it out.

Covid-19 has taught us that disaster may come any time, in any shape and without information. We must remain prepared for this type of incidences, to survive, to get the best value of our business in case of selling the same.

Common mistakes related to Business valuations committed by Business owners

1. Non-taking the valuation for ongoing Business

You have planned or not, for selling, transferring of your business, a professional valuation of the business, as a going concern is essential. It is the preparation against the triggering events. A valuation on ongoing business also benefits in growing the business, targeting for the future, taking a loan in case of need, valuing our workmen force and other related matters. Owner can focus on value enhancement adjustments to various aspects of the business, including personnel, business planning, sales, marketing, legal, and operations. These adjustments can potentially increase profitability as an ongoing business and likely result in a higher price. However, if the sale is inevitable, owner may demand the best price. It is also observed that number of assets are not reflecting in the Balance sheet, which are amortized, but have a handsome value at present also. For these assets, value can be tapped by the on-going business valuation.

2. Valuation at the Eleventh-Hour

As already discussed, disaster, musibat, vippati may come at any time and beyond our estimation. If we are not prepared, it may become havoc for us. Circumstances may force us to sell the business, to avoid the further losses being unable to survive. Valuation taken at the Eleventh-Hour for selling the business will be prepared in haste and without taking the reasonable parameters, models, methods and approaches. It will not serve our expectations.

According a survey report, “lack of readiness prevents the Business owners, from harvesting the value of their business.”

3. Valuation is not taken by Qualified, Experienced Valuer

A business valuation includes numerous complex variables that must be considered. Only a qualified professional, may have the in-sight to avoid the mistakes and inaccuracies. Hence the valuation should be obtained to the best extent from the Experienced Valuer.

Although all the valuation professionals are qualified, certified by the IBBI and supported by the Registered Value Organizations, they differ in Experience, Expertise, and Depth of knowledge as valuation professionals. A valuation not prepared by a qualified professional is sometime discredits the profession and is challenged in the Court of Law.

Valuation performed by a specialist, based on accurate modeling and sound numbers, will result in maximum financial returns for the business owner—either as an ongoing business or ultimate sale.

4. Hiring a Valuer without current, up-dated knowledge in valuation Field

A valuer must be aware of new precedents and guidelines regularly emanating from International Valuation Standards, ICAI valuation Standards, guidelines from Insolvency and Bankruptcy Intuition (IBBI), case studies and the court cases. There are always new types of risks that need to be incorporated into valuations. For example, there is the risk of cyber-data breaches that could be detrimental to the value of a business.

Historically, valuations for private companies have utilized traditional valuation methods. Valuators of public companies have been more innovative in the ways they view different businesses and industries, which has led to new methods that can be considered for certain private companies.

One example of an innovative valuation method is customer-based corporate valuation (CBCV). Unlike the traditional top-down method, this valuation is a bottom-up method that considers each customer’s value. CBCV can be applied to businesses with recurring types of revenue streams, such as subscription models. If performed correctly, a CBCV valuation could result in a higher valuation of a business than more traditional methods. A valuation with insufficient knowledge and updated guidelines may leave the money on the table.

Hence it is essential that anyone hired to do the valuation is current in their knowledge and skills. The art of valuation is dynamic and continually evolving.

5. Lack of proper Due Diligence, Insufficient Data Gathering and Analysis

The lack of proper due diligence and insufficient data gathering and analysis are common mistakes in the valuation process. Proper due diligence requires a thorough understanding of both the company’s industry and business. To ensure the proper level of due diligence for the business is being valued, the qualified professional interviews the owners and other key stakeholders, visit the company’s offices, and becomes versed in all relevant aspects of the business. As for data gathering, it is imperative that data utilized to formulate calculations are always readily verifiable from current and credible sources. Data that is unreliable or dated can be more easily challenged.

6. Errors in Valuation Report Presentation

The final valuation document could be in the form of a summary report or a detailed report. It can be a calculation assignment or a conclusion assignment. But whatever its format, it should follow a clear, logical flow and be free of mistakes and calculation errors. It should also be consistent and cohesive.

Additionally, approaches both used and rejected in the valuation computation should be appropriately explained, with all assumptions defended and supported.

Due to the subjectivity of valuations, the valuation analysis is the opinion of the qualified professional, not fact. Regardless of how “correct” the conclusion of the valuation may appear; it will not be acceptable in the absence of a complete and comprehensive analysis.

7. One Size Does Not Fit All

Business valuation is both an art and a science. Not one-size-fits-all proposition, credible and reliable valuations are based on a variety of factors, including historical facts, calculations using past and current data, and subjective judgments. To be assured of accuracy, the valuation should be performed by a qualified professional who is immersed in the relevant facts and details of the company and industry.

The complex valuation process is prone to a multitude of common mistakes, errors, and omissions that can skew a final valuation number and render it inaccurate and legally inadequate. Hiring a business valuation professional requires thorough, diligent consideration to make sure an accredited, experienced, and reputable valuation partner.