6 Most Common Mistakes in Company Valuation Studies

As a company specializing in company valuation, we have come across numerous mistakes in valuation reports that we have seen in the market. We have compiled and would like to share with you the ones that have the most impact on value.

• 1. Incorrect Calculation of Weighted Average Cost of Capital in the Discounted Cash Flow Valuation Method

  Especially the incorrect determination or formulation of indicators such as Beta coefficient, risk-free rate of return, country risk, the asset distribution of the company, and tax structure hinder the accurate calculation of the company's value.
  
  

• 2. Using the Same Multiples for Companies of Different Sizes

  This is one of the most common mistakes in company valuation studies. Since it is easiest to access company data from stock market records in the industry, valuation experts consider these multiples valid and neglect to take into account the volume premium. The correct practice is to discount the data in question and also use the share transfer agreements of non-publicly traded companies in the same sector. Even if they are in the same sector, two companies should be valued with different multiples because they have different sizes. Moreover, the maturity level of the company (early-stage, growth, and maturity) also affects multiples and value.
  
  

• 3. Overly Optimistic Approach in Future Cash Flow Assumptions

  This is one of the biggest mistakes made even by the largest players in the industry. Despite the limited performance of the company in the past five years, rapid growth and high margin models are constructed for the future. After all, reasons can be found for being optimistic. However, over time, plans do not go as expected, and excuses are made. This approach will also mismanage investor expectations and, more importantly, bring performance-based share transfer agreements (Earn-Out) to existing shareholders.
  
  

• 4. Not Subjecting Company Financials to Preliminary Audit (Adjustment)

  Another significant mistake we encounter is using the company's raw financial data when conducting a company valuation. The company's assets and resources must be adjusted according to the potential realization of terminating an operation.
  
  

• 5. Determining Company Value Based on Future Cash Flows

  One of the significant misconceptions is that company valuation should be calculated solely based on the free cash flow the company will generate in the future. Yes, the cash the company generates in the future will be decisive for investor returns. However, the book value of the company and multiples of similar companies should be included in the valuation at least as much as future projections.
  
  

• 6. Conducting Company Valuation Studies Solely Based on Financial Data

  Perhaps the most impactful mistake. A company is a dynamic entity and is not merely limited to numbers. Can companies operating in the same sector with the same revenue and profit have the same value? A valuation report that does not take into account factors such as dependency on a large customer, management by a single owner, and innovation cannot provide accurate results.
  

VALURA, with its hundreds of company valuation experiences, award-winning software, and unique methodology, will continue to be the preferred choice for shareholders/investors who want to learn the most accurate company value in company valuation.

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