5 common mistakes in company valuation

Just as important as the technical concepts to be applied in a valuation process is the way in which the valuation is structured in order to avoid making the 5 common mistakes in company valuation. A process that lacks the correct structure and organisationcan lead to misunderstandings and misleading results.

It should not be forgotten that the valuation of companies involves the participation of several parties, mainly the valuation agent and the company being valued. It is therefore important that the approach, involvement and roles of both parties are clear and that each party brings to the process what they are experts in, making up for the shortcomings of the other.

The following are the most common mistakes that prevent us from achieving the following the objectives of the valuation.

1. Do not review any of the client's assumptions.

As is well known, business valuation is based, among other things, on a number of assumptions about sales, costs and investments. It is common, in this process, to consult the client about his expectations, as he is the one who knows the business and the sector best.

However, this does not mean that all projections provided by the company should be taken at face value, but rather that they should be checked and contrasted with our own information. In this way, we can verify whether they make sense and are therefore feasible.

2. Commissioning an assessment and not getting involved in it

Notwithstanding the previous point, it is not advisable, far from it, for the company to completely disengage itself from the valuation process. It should not leave everything in the hands of the investment bank or boutique to whom it has entrusted the valuation process.

As the company itself has the best knowledge of its situation and the functioning of the sector in which it operates, it must work together with the valuer to combine this knowledge with the knowledge of the sector in which it operates. expertise that such a professional can bring to you.

3. Assign the valuation of a target company only to the finance and accounting department. 

It is clear that the future of a company does not depend exclusively on the finance and accounting department. It is the company as a whole that will determine its future. Therefore, it is advisable to have the marketing, production, human resources, etc. departments involved in order to have a better and more complete vision of the company's performance and, above all, what can be expected for the future.

4. Assigning the valuation of a company to an auditor

It should be borne in mind that auditors are experts in accounting, but not in company valuation.

Auditing primarily examines the past, whereas valuation is concerned with the future. The two activities are radically different, so that work as an auditor has nothing to do with valuation. Consequently, you cannot give any assurance that a valuation will be carried out in the correct way.

5. Assigning the valuation of a company to a professor of economics with no business experience 

As has already been pointed out, theoretical knowledge is important and one of the foundations of valuation, but many other virtues are necessary to be able to carry it out correctly.

Therefore, a professor of economics who has no experience in the field, or who is unaware of other equally important aspects such as, for example, the strategy or legal aspects of the company, may confuse certain applications of the theory and neglect other aspects in the process that should be taken into account.

Source: 201 Common errors in company valuation. Pablo Fernández. 2008.

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