Valuations are needed for a wide range of reasons – when buying or selling a business, to resolve shareholder disputes, divorce settlements, buy-outs, or for tax purposes. In these cases, getting a valuation opinion from a non-specialist may be a seemingly quick and cheap option. But in our experience it invariably leads to poor advice, disputes, and spiralling costs.
As valuation experts we are often asked to review third party valuation reports. In many cases basic flaws in valuation methodologies have led to the wrong advice being given to the parties. The result may be a substantial loss in value for someone or a never-ending argument between the two sides.
We have now identified the top seven valuation errors that we regularly encounter.
Basis of confusion
Undertaking the valuation on the wrong basis: market value v fair value; or even valuing the wrong items, such as shares v business assets and goodwill.
Earnings…and earnings
Making no adjustments to the reported earnings to derive underlying profitability, or conversely making spurious amendments designed to inflate or deflate the valuation.
One size fits all
Applying a single generic value index. Whether this is the FT All Share PE ratio, the BDO Private Company Price Index, or the UK200 Group SME Valuation Index, a simplistic market pricing multiple will rarely produce an appropriate valuation.
Multiple mistakes
Applying valuation multiples from deals that are not really comparable and not taking into account the market context.
Take a discount
Incorrect use of discounts and premiums. Such as taking a listed company PE multiple and discounting for size and then discounting again for a minority interest.
DCF…MIA
Failure to consider the use of discounted cash flow analysis, or application of unsupported discount and growth rates.
“Computer says…”
Relying solely on a computer model, whether it’s a simple online tool or a complex Monte Carlo simulation, only ever gives a false feeling of valuation accuracy.
As one of a select number of valuation specialists on the Panel of Experts of the President of the Institute of Chartered Accountants in England & Wales our clients can be assured of receiving insightful advice and a sound valuation from us.
For further information please contact Simon Chapman on 01926 468705 or via email at simon.chapman@burgisbullock.com