Valutico is the world’s leading all-in-one valuation platform, developed by data scientists and valuation experts. Valutico’s specialists noticed some common errors that occur when practitioners are conducting business valuations, and they’ve summarized five mistakes to avoid below.
1. Using too simplistic a method
Sometimes practitioners will only use a ‘back of the envelope’ calculation when conducting a valuation, which is certainly much easier than other methods, but can lead to false conclusions.
It’s useful to do valuations fast – the Valutico platform is built for that reason – but it’s not a good idea to cut corners.
2. Choosing the wrong peer companies
When conducting a comparable company analysis, it’s very important to compare with the right peer companies and not the wrong ones.
Good advice is to find those in the same or similar industry and region, although not necessarily the same size. Choosing micro-cap companies as peers is not a great approach for instance — they trade less frequently leading to distorted valuations, or they may have more volatile earnings with periods of negative earnings meaning unusable multiples.
As choosing the right peer companies is so important, it’s one of the main reasons Valutico developed a search system in their platform to make this step easy.
3. Not benchmarking the operating metrics (when choosing peers)
When choosing peer companies, one critical check is to benchmark the operating metrics of the peer companies, such as sales growth, EBITDA or EBIT margins, against the company you’re performing the valuation on.
It’s usually a good assumption that companies operating in similar industries, exposed to similar risks, should have similar operating metrics. If the peers have vastly different operating metrics, you should try to understand why or question whether these companies should be included.
Once more, Valutico’s platform is designed to make this step – benchmarking operating metrics – particularly simple.
4. Having a growth forecast that’s too optimistic
In the Discounted Cash Flow (DCF) valuation method, having a hockey stick-like growth in your projections may indicate these projections are not realistic.
A useful tip is to check for consistency between the forecast margins and historical margins — EBITDA margin, EBIT margin, and Net Income margin.
5. Perpetual growth rate too high
It’s important to get the terminal value right in a DCF analysis, because it can be such a substantial portion of the overall valuation. As the perpetual growth rate is the main driver of the terminal value, it’s critical to get this right too.
The most widely accepted assumption for the perpetual growth rate is the company’s country’s long-term inflation target. The rationale being this assumes the business has reached a mature state, no longer increasing market share or expanding in other ways, but simply increasing sales prices (and free cash flows) in line with other prices in the economy (i.e. inflation).
With almost a million transactions, 3TB of world-leading financial data, and a system trusted by 500 financial firms in more than 70 countries, Valutico’s powerful valuation platform is ideal for accountants. Already widely used across the UK, it’s helping hundreds of accountants globally power the valuation component of their businesses. Book a demo with our UK-lead Greg Brown, he’s working closely with the ICAEW and very happy to have you reach out so he can answer your questions.*The views expressed are the author's and not ICAEW's.