9 Misconceptions About Valuation

In this blog post, we will discuss 9 valuation myths.

Valuation is a process in which the value of the company is estimated. When it comes to valuations, there are many opinions and also many misconceptions. In this article, we will present nine myths related to valuation. 

Let's dive right into it.

Myth #1: The valuation objective is to search for a "true" value

Value, on the other hand, is defined as value. An asset expected to generate income of $100 this year and $100 a year from now is worth $200. But people may be willing to pay more for it (if they think they can increase the income from it) or less - if they believe there is a chance that the firm's revenue will be higher.

In other words - different people will have different opinions about the property, and therefore they will be willing to pay different prices for the right to receive the asset.

Myth #2: There is no difference between “price” and “value”

Myth #2 is similar to Myth #1. We listed them as two separate myths because some people use the expression "true value" and some use price.

Myth #3: There is no connection between "price" and "value"

As we wrote above, value is different from price. At the same time, there is a correlation between them. Properties with a high value will have a high price, and properties with a low value will have a low price.

Myth #4: A reasonable valuation provides a precise estimate of the value

Different appraisers use different valuation methods. Even when two appraisers use the same valuation method, they can base it on different assumptions - such as the price of capital, the interest rate, etc. Therefore - there is no single value for a company. A valuation for the same company can lead to different values.

 Myth #5: The more quantitative a model, the better the valuation

There are different valuation methods. There are qualitative methods, and there are quantitative methods. Not in all cases, the quantitative methods are the most appropriate to evaluate a particular company.

Furthermore - even when quantitative methods are the best, the valuation's quality is also related to the parameters used for valuation. The more thoroughly the parameters used for valuation are examined, the better the valuation will be.

Myth #6: Business owners should get a valuation before selling the business.

Getting a valuation just before selling the business is a bad strategy. When you sell the company - you want the price you will receive in exchange for the business to be maximum. The only way to get the full price is to understand the value of the business long before trying to sell it and the factors that can affect the value. That's why the valuation can help with the things you need to focus on to maximize the value of the business.

Myth #7: A business valuation will help you negotiate a higher price.

This myth is true - if you use it correctly. A valuation report with high value can help you get a high selling price. How can you do that? First, get the valuation reports. Second, create leverage by having multiple buyers competing to acquire your company based on your valuation report so that a bidding war ensues. Competition maximizes your power.

Myth #8: Use a business valuation to keep a score on your business's performance.

Getting a valuation report once a year or every several years can help you track and evaluate the company’s growth and the performance of its leadership team. The valuation presents metrics that provide accurate and timely feedback on business progress and leadership team performance. This saves you the valuation cost and provides leadership teams with an actionable tool for tracking performance. 

Myth #9: Valuation must be done by a professional appraiser

Most people believe that a professional appraiser must do a valuation, which costs a lot of money. The truth is that today there are cheap tools that make it possible to carry out valuations in a simple, affordable way, which is suitable even when the budget is low.

Conclusion

In this article, we discussed 9 Misconceptions About Valuation. Suppose you look for a straightforward way to evaluate your business, manage your cap table, or create a pitch deck. In that case, you can try our intuitive ai based business valuation software or our business valuation calculator, or you can contact us for free advice or schedule a demo.