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The 7 most common mistakes when valuing a company
Most flawed valuations do not fail because of the method, but because of starting errors that repeat over and over again. These seven explain most of the broken expectations in a negotiation, and all of them are avoidable.
01. Believing that revenue determines value
It is the number one mistake. Selling a lot and earning little reduces value rather than increasing it: it means more structure, more working capital and more operational risk for the same profit.
A buyer does not buy revenue. A buyer buys the ability to turn it into cash.
02. Stopping at EBITDA
EBITDA is a useful starting point and a terrible conclusion. It does not capture growth, risk, revenue quality or intangibles.
Two companies with the same EBITDA can be worth twice as much as one another. We develop this in EBITDA vs real value.
03. Ignoring intangible assets
Brand, software, client portfolio, know-how, processes. In many companies this is the largest part of the value, and it is left out of the conversation simply because nobody has listed or documented it.
It means giving away the part of the value that has been hardest to build.
04. Using a non-normalized EBITDA
The EBITDA a buyer will look at is not the one in your accounts. It is the adjusted one: without the partner’s personal expenses, without extraordinary income, without related-party rents that are off-market, without family members on the payroll with no real role.
If you do not normalize it yourself, the other side will. And always in their favor.
05. Forgetting about debt
The sector multiple applies to enterprise value, not to what you will actually receive. To arrive at the price of your shares, net financial debt must be deducted:
Equity value = (EBITDA × Multiple) − Net financial debt
This is why many transactions disappoint at closing: the multiple was the expected one, but the debt had never been mentally deducted.
06. Comparing with transactions that are not comparable
If a fund paid 12 times EBITDA for the leader in your sector, that multiple included market share, scale and synergies that your company does not offer. Using it as a benchmark creates an expectation that no buyer will validate.
The same applies to the multiples of listed companies: they incorporate a liquidity and size premium that does not apply to an SME.
07. Not updating the valuation for years
A figure from five years ago is not an old figure: it is a false one. The business has changed, the sector has changed and buyer appetite has changed too.
The mistake that encompasses all the others
Behind all seven there is one common mistake: valuing the company only when a transaction is already on the table. At that point, the goal is to justify a figure, not to understand the business. And a valuation made to justify rarely withstands scrutiny from the other side. It is much like going to an exam having studied only the day before.
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FAQs
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