Avoid These Common Mistakes When Calculating the Value of Your Business


Since the advancement of science and technology, everyday a large number of businesses, both large and small in size, or public and private are following the business valuation procedures due to the expansion of the business market in the global scenario. When you are considering to sell your business, you may come across several valuation literature with major business advancement skills and different educational pathways in order to up-skill your business valuation knowledge. Still a lot of business owners conduct certain mistakes while undertaking the engagements of such nature.

In this article, you will come to know about the most common mistakes for business valuation that you must avoid and why you must use some kind of business valuation calculator to accurately value your company in order to sell it.

  1. Mistakes in Calculating FME and ‘Average of 3’

While calculating the Future Maintainable Earnings (FME) by applying Income Approach with capitalization methodology, the common practice is to calculate the average for the past three financial years. Such method is typically flawed since the concept of FME always needs to look forward, not the retrospective move for assessing the earnings.

Often errors occur while calculating the average for the historical results for magnifying the wages, material costs, rents and other expenditures have been rapidly changed. In addition, the expenditures of shifting to larger premises or the expanded workforce cannot be captured in the appropriate manner. Moreover, in the averaging process, any changes in the pricing and departure from the earlier gross margins can be overlooked.

  1. Mistakes in Determining The Economic Drivers

In this fast pacing world, businesses are also subjected to undergo through constant changes. While some of the industries are sinking due to the technological disruptions, others grow uninterruptedly. Therefore, from the context of a business valuation, it is essential to determine the external factors as the key drivers for your business. From the research of IBISWorld, it has been come to know the industry reviews of ‘fly and fall’, which focuses that history is a poor guide for business valuation at either side of the spectrum. For example, in 2015 some of the suggested underperformers are referred to those who are engaged in manufacturing of construction machinery and mining. In the previous years, video stores and news agencies were named as the underperformers. Some of the outperformers are online groceries, hydroponic crop farming and so on. Therefore, when you are aiming to determine your business valuation, be it for selling a company or for other reason, you need to have deep understanding about the industry drivers that will help you to avoid impractical valuation conclusions.

  1. Failure to Crosscheck

The business valuation methods are always subjected to high discipline and it is the fact that getting the absolute agreements between the practitioners is rare. In spite of the fact that most of the business owners exclude the process of cross checking the business valuation conclusions which is one of the major paramount for confirming or dejecting any assertions. Such crosscheck helps to tighten the valuation range, ensure the outputs are relevant to the ‘real world’ and dismiss the erroneous conclusions. Therefore, conducting crosschecks using alternate methodologies is essential in order to validate or question the basic approach.

If you are new in business valuation, it is advisable to take help of a professional business valuation calculator who has expertise about the present trends of the industry and different techniques of business valuation methods.