Valuation Advisory Services that Optimize Transaction Outcomes
Traditional business valuation reports often contain several weaknesses that can jeopardize business transactions, whether you’re looking to scale or sell. After evaluating many inferior third-party valuations that caused their associated transactions to fail, we’ve identified some of the most common errors that innovative growth companies should avoid during the valuation process and when working closely with valuation advisors.
Review the top mistakes below and download a shareable recap document for more common errors and ways of avoiding them in your valuation initiatives.
Valuation Advisory Missteps
Many valuation advisory services steer companies in the wrong direction with faulty or forgotten calculations and even weak competitor sets that don’t help valuations hold up under scrutiny. Ensure your advisor doesn’t limit the scope of their analysis by providing only projected income statements without balance sheets or cash flow statements. They must calculate projected ROA, ROE, and ROIC for your company to compare it to public comps and connect these ratios to growth assumptions, helping justify whether these comps, and their implied multiples, are good fits for the company. It’s smart to also stay away from simple five-year forecasts with unsubstantiated terminal growth rates. Have your advisor look within the industry and at the global landscape to determine appropriate terminal growth rates for better business valuation outcomes.
Normalization Errors
Be conscious of making inaccurate or improper normalizing adjustments. Appraisers may wrongly assume the significance of non-operating assets, liabilities, income, and expenses; use flawed market data for owner compensation or rent expenses; or overlook accounting standards, leading to faulty comparisons. This can compromise the reliability of valuation opinions. Evaluate the descriptions and rationale for adjustments to verify information accuracy.
Inappropriate Benefit Streams
Different benefit streams—typically expressed as cash flows such as Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE)—can lead to varying values, and errors in calculating these streams can cause significant inconsistencies. Interest should be properly included or excluded in benefit stream calculations to promote accurate valuation results.
Improper Discount & Capitalization Rates
The income approach to business valuation applies discount rates (reflecting an investor’s expected return considering risk) and capitalization rates (subtracting the expected long-term growth rate) to determine the present value of a company's future benefit stream. As these rates are based on subjective judgments, it’s important to examine the methods used to develop them.
Improper Application of Discounts
Errors in judgment or misuse of data can lead to improper application or omission of the discount for lack of control (DLOC) and the discount for lack of marketability (DLOM)—another mistake that can greatly impact a company's value. Factors like dividend capacity, liquidity timeframe, transfer restrictions, and stock redemption policies influence marketability. Business valuation services must clearly explain assumptions and reasonings behind discount application with qualitative and quantitative data and consider these factors to prevent inappropriate discounts.
Find a Best-Fit Valuation Advisor
Marion Street Capital leverages relationships with institutional investors, local and national banks, expert networks, top academic institutions, outsourced software development teams, graphic design services, and industry information providers to make the most of business valuation models. Our robust suite of services helped clients navigate over two dozen unique industries during the last five years, and we’re confident that our valuation advisory services will help you target investment capital, employ Board-level strategy, and implement financial alpha.
Need expert support? Contact Marion Street Capital today.