Calculating the Weighted Average Cost of Capital Incorrectly in Discounted Cash Flow valuation methodology;
Incorrectly determining or formulating the indicators such as Beta coefficient, risk-free rate of return, country risk, the asset allocation of the business, tax structure prevents the correct calculation of the company value.
Using the same multiplier for businesses with different sizes;
This is one of the most common mistakes made in the company valuation process. Since data of the business operating in the sector can be accessed easily from the stock market records, the valuation experts accept the said multipliers as valid and do not take into account the volume premium. The correct practice is to discount the data in question and also to get and use the share transfer agreements of non-listed businesses. Two businesses should be valued using different multipliers because they have different volumes even if they operate in the same sector. Even the maturity level of the business (early stage, growth, and maturity) affects the multipliers and the value.
Overoptimistic approach to the free cash flow assumptions based on future projections;
This is one of the most common mistakes made even by the biggest players in the sector. Even though the past 5-year performance of the business is limited, fast growth and high margin models are designed for the future. After all, there are reasons to be optimistic. However, it is observed that the plans do not work as expected over time, and it is possible to face excuses. Also, this approach will mislead investor expectations and, more importantly, lead to performance-based share transfer agreements (earn-out) for the existing shareholders.
Failing to pre-audit (adjust) the financial data of the business;
Another important mistake we observe is using raw financial data of businesses in company valuation. Financial data of the business should be adjusted according to the actual assets and liabilities by updating the business assets and resources under the assumption of possible termination of activity.
Determining the business value based on the value created by the future cash flow;
One of its major misconceptions is that company valuation should only be calculated based on the future free cash flow generated by the business. Yes, future cash flow will be a decisive factor for the return on investment. However, the book value of the business and the multipliers of similar businesses should be included in the valuation process at least as much as the future predictions.
Making company valuation studies based on only the financial data;
Perhaps, this might be the mistake with the most significant impact. Business is a dynamic being, it is more than just the figures. Can businesses that operate in the same sector and have the same turnover and profit have the same value? A valuation report that does not take into account factors such as dependency on a large customer, management of a single boss, and innovation will not give an accurate result.
