Article adopted from our trusted partners; Bizval
How much is my business worth?
When you commission a business valuation, you’re essentially purchasing a professional opinion on what your company is worth. But not all opinions are created equal. After reviewing hundreds of valuations over the years, certain patterns emerge that separate the wheat from the chaff when determining ‘how much is my business worth’.
Here’s what to watch for when assessing whether you’ve received quality work or something that might cause problems down the line.
The methodology minefield
The most glaring red flags often appear in how the valuation approaches are applied and combined. Best practice suggests that you should use multiple valuation methods to cross-check your figures, but the execution matters enormously.
One particularly troubling practice involves mixing methodologies in ways that make little mathematical sense. Picture this: a valuator calculates enterprise value using one approach, then adds net asset value from another, and finally applies an arbitrary discount “for good measure.” This isn’t sophisticated analysis; it’s mathematical confusion dressed up in professional language.
Double counting presents another common trap. When operational assets are already reflected in earnings or cash flows, adding them again through asset-based approaches inflates values incorrectly. The most frequent culprit here involves working capital, where valuators sometimes fail to consider whether current trading levels are sustainable or representative.
Revenue multiples also deserve particular scrutiny. When someone applies a blanket multiple without examining underlying margins, growth prospects, or capital requirements, they’re essentially playing valuation roulette. A business generating 3% margins shouldn’t be valued using the same revenue multiple as one generating 15%, regardless of industry averages.
Financial data forms the foundation of any valuation, yet outdated or unrepresentative information appears in reports more often than it should. If your business has undergone significant changes in the past year, whether operational improvements, market shifts, or structural modifications, these should be reflected in the analysis. Using three-year-old financial statements to value today’s business is like using last season’s weather forecast to plan tomorrow’s picnic.
The dangers of cookie-cutter thinking
Some valuators treat discounts and premiums like items from a discount store catalogue, applying standard percentages regardless of specific circumstances. Fair market value is often derived from public stock data. So, business valuation professionals usually discount private business interests for their relative lack of marketability, but the application of these discounts requires careful consideration.
A discount for lack of marketability (DLOM) might be appropriate for a minority stake in a family business with restrictive shareholder agreements, but applying the same discount to a controlling interest in a profitable company with strong buyer demand shows a fundamental misunderstanding of market dynamics. The DLOM can range from 30% to 50% or more, depending on the specific circumstances of the investment, but these should be justified by actual circumstances, not pulled from a standard table.
Similarly, equity risk premiums and other adjustments should reflect the specific business being valued, not generic industry assumptions. Your technology consultancy deserves more nuanced treatment than whatever multiple the software sector averaged last quarter.
When comparables aren’t comparable
Public market comparables can provide valuable benchmarking, but they can also mislead when poorly selected. Using publicly traded companies as comparisons for small private businesses often creates false equivalencies. A listed technology company with global reach, professional management, and diversified revenue streams operates in a different universe from a local IT services firm with three employees and one major client.
Yet valuators sometimes make these comparisons anyway, then apply additional discounts to bridge the gap. The result is often a house of cards built on questionable foundations. True comparability requires examining business models, growth profiles, profitability patterns, and competitive positions, not just industry classifications.
When good intentions create bad results
Not every problematic valuation stems from incompetence or corner-cutting. Sometimes the issues are more subtle, involving presentation and communication rather than mathematical errors.
Overly complex language and excessive jargon can obscure rather than illuminate. Many business valuation reports include a general lack of support for subjective factors, or the analysis is only a mere regurgitation of facts with no discussion of ‘why.’ If you can’t understand how the valuator reached their conclusions, the report’s utility diminishes significantly.
Length doesn’t automatically equate to quality. While comprehensive analysis requires thorough documentation, reports exceeding 100 pages often contain more padding than insight. The best valuations clearly explain their reasoning without burying it in unnecessary detail. If the valuator can’t summarize their key findings and methodology in a few pages, question whether they truly understand what drives your business’s value.
Most importantly, a good valuation should enhance your understanding of your business’s value drivers and detractors. If you finish reading the report without gaining insights into what makes your company valuable or how that value might change, the exercise has failed its primary purpose.
Moving forward
Recognizing these red flags doesn’t require becoming a valuation expert yourself. Instead, focus on ensuring your valuator can clearly explain their methodology, justify their assumptions, and demonstrate how they’ve accounted for your business’s unique characteristics when answeri
Ask questions. Challenge assumptions. Request explanations for any approaches or adjustments that seem questionable. A competent valuator will welcome this engagement and provide clear, logical responses. Those who respond defensively or dismiss your concerns might be revealing more about their work quality than they intend.
Remember that valuation is part art and part science. While opinions may vary, the reasoning behind those opinions should always be transparent, logical, and tailored to your specific circumstances.
The goal isn’t perfection, it’s professional competence applied with integrity to your particular situation. You deserve nothing less, and your business decisions depend on it. How much is my business worth?
Contact Griggs Business Brokers if interested in getting a valuation on your business or selling your business.