Common Mistakes in Business Valuation
- * Not really defining what is for sale -- Are all of the trademarks, copyrights, patents or other intangibles included in the sale price? For example, in the sale of a fast food chain, are the
- proverbial "secret recipes" included in the transaction price?
- * Forgetting favorable attributes-- A stone quarry may have one of the few available permits to excavate in a particular state or county, or a distribution business may own exclusive territorial
- rights, etc. These attributes should result in a premium on the valuation of the business.
- * Not discovering the true level of earnings - Making accurate adjustments to earnings (normalization) is essential to recognizing the real earning power of a company.
- * Not finding the value detractors - Nothing is perfect. Is the business concentrated in just a few customers? Is the equipment antiquated? Are the financial statements in disarray? Will
- significant capital expenditures be required in the near future? Consideration must be given to the impact of potential value detractors such as those listed above.
- * Forgetting the real value of the assets - It is easy to forget that particular balance sheet items may be worth more than their indicated book values. For example, capital equipment may have
- been depreciated to an amount significantly under its actual value.
- * Selecting the incorrect earning period to capitalize or discount - Are they last year's earnings, an average of the past few years, or merely a projection of next year's earnings? Historical
- earnings cannot be used if future earnings are expected to be substantially different.
- * Choosing an inappropriate multiple or capitalization rate - Is it applied to EBIT or EBITDA and why? How was this multiple derived? Today's EBITDA multiple is not necessarily tomorrows!
- * Not considering current market conditions - The current business climate and economy can significantly impact valuations. Changes in overall market conditions can cause valuations to
- substantially fluctuate. This point can clearly be seen in the recent devaluation of Internet companies.
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