A business valuation can be done for several reasons and in several ways. The results that a business valuation gives should be accurate because these are used to improve the profitability of the business and to take crucial decisions.
- Not having a clear goal laid down
The actual results obtained during a business valuation would depend on the performance of the business in the short term and long term. But the parameters being studied and the method of valuation chosen would depend on the goal of the valuation. So if you start business valuation without an object you would not be able to find the right method to use.
- Not giving valuation the attention it deserves
Business valuations done by companies acquiring other companies are often done with utmost accuracy. But valuations done by the business to simply gain an insight into the worth might not be given an equal importance. But be it for acquisition or for decisions on ESOP or for a general study about the value, valuation should be given the importance it deserves.
- Ignoring the gaps in data
There should be great attention given to documentation right from the early days. This would make sure that there are no discrepancies in the data is documented. Gaps in data might lead to inaccuracies in valuation. This magnifies when you plan to sell your business. If the valuation done ignores missing data then the buyer side valuation which might demand every piece of information might deviate from the observations from the previous valuations. This would make it more complicated to understand the real value of the business.
- Not understanding the difference between cash flow and accounting profits
Profits and cash flow appear very much similar but they are a lot different as well. The profits that a company makes indicate the success of a new measure that was implemented. But the cash flow indicates the consistency in the processes. Valuation should give more importance to the cash flow than the accounting profits. Accounting profits give a sneak peek into the short-term performance. But for understanding the real worth of the business the long-term value should be understood and cash flow deserves special attention in this case.
There might be several generic ways to assess a company. But no matter how many similar firms exist, there are some risks specific to each organization. The liabilities and the assets, operating costs and other factors would also determine the results of the valuation.