Why, you ask, aren't all valuations for the same business or asset alike? How can they differ s much?
There are reasons for divergence of opinion. And they usually involve one valuator being an advocate for the client, not an objective, independent professional. However, applying the same basic facts and assumptions to the process should result in the values at no more than a 10% variance.
Here are the primary reasons why valuations on the same asset diverge:
- Using too few guideline/market transactions. We have seen valuations that use only 1 or 2 guideline transactions, which is usually not a large enough sample size.
- Using guideline transactions that are not similar, e.g., different size, products or services, growth rates, etc.
- Not properly calculating cash flow.
- Depreciation exceeding capital expenditures in perpetuity.
- Improper calculation of working capital or excess working capital.
- Projecting revenue growth by using an annual % increase each year without understanding what component is making revenue grow….is it due to higher volume, higher price or both?
- Using a long-term growth rate that exceeds the growth of the economy.
- Relying primarily on case law to determine the size of discounts for lack of control or marketability.
- Math Errors – always check the math.