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Some Common Pitfalls When Reviewing Business Valuation Expert Opinions

Some Common Pitfalls When Reviewing Business Valuation Expert Opinions

Business valuation is a necessary process for business owners as it provides vital information to them. A deep insight into the transaction prices and the value of shareholders’ equity both can help in reaching the business goals. The business management team must have true insights and conclusions to rely on. To avoid unpleasant surprises, be sure your valuation experts avoid these common mistakes while reviewing.

• Choosing the Wrong Business Valuation Approach: Generally, the valuation process requires a fair market value. Regardless of the purpose, if the legal parameter is provided by the attorney as of date then it needs to be chosen for analysis purposes. It is considered better than to rely on the company information and market only.

• Not understanding the difference between Net Book Value and Market Value: There is no guarantee that there is no difference between the balance sheet of the company and the market value of the asset or the company. The balance sheet is created based on past data and it can differ from the market value due to the unrecorded liabilities of the company. Leaving the key asset or liability out from business valuation, puts a great difference. As a result, it can lead to a misunderstanding of the true market value from the net book value.

• Overreliance on the historic data: The company’s history, management, ownership structure, and financial measures of historical performance are imperative while valuation. To create value, it provides a suggestion of the market’s perception as well as the performance of the company and is evaluated. But, the analysis of historical performance and data requires careful consideration. Most of the time Business Valuation Experts forget the non-operating assets and non-recurring events while estimating the value of the business. It is essential to remove the non-recurring events from the historical performance while measuring the future value. On the other hand, the non-operating assets’ valuation is also important.

• Not seeking the secondary option: When in doubt, then you must take a second opinion. There may be a time when you notice one or more mistakes in your business valuation. At that time, consider getting a second opinion. An experienced valuation expert can help clear your doubts and make the right decision and strategy for your business. Also, attorneys may help you get new opinions on areas outside your idea and your scope.

• Accounting Based Earning and Cash Flows: For a company or business, the expert may consider accounting-based earnings to find out the expected future cash flow. In this process, the experts may forget to consider the real value driver “cash flow”.

There is some cash or transactions that are not processed but are expected to occur in some future date. Since the money is not in your account yet and there is a risk you will not get all or part of it when expected. At that time, the income valuation approach is used to figure what kind of money the business is likely to bring as well as to assess the risk. It lets you calculate the present business value with expected income and risk related to it.

• Failing in Risk Assessment: It is necessary to find out the risks for any business. Each company has its risk factors that need to be analyzed for proper workflow. These factors may be financial or operational that can cause a nasty mistake while business valuation.

A small mistake can creep into your business valuation in several ways. It can lead to trouble for valuation professionals who aren’t careful. So, keep an eye out for these common pitfalls when reviewing business valuation expert opinions.

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