When company owners are contemplating selling, they often have a belief about what the company’s market value is. This figure, without a professional valuation, is the root of a lot of future problems with the M&A transaction. Without a professional valuation, the owner most often has a conclusion that does not take into account the steps required to adjust certain data points. If owners do not receive a valuation professional’s conclusions, they enter the market without the full picture, making decisions merely on their beliefs. This path leads to undesirable outcomes for the sellers.
Like sellers, infrequent buyers unfortunately make significant valuation mistakes. For example, one mistake is to not apply discounts for lack of marketability for private companies. Such discounts can result in a 35-percent adjustment.
Also, if they do not triangulate between multiple methods of valuation, and if they do not use multiple comparables with each method, they will not reach the best conclusions on the valuation.
Additionally, if they do not adjust the target for the purpose of the valuation, that is, an acquisition, they will reach conclusions that are not correct for market valuation range for their transaction.
Unfortunately, too many companies pursuing M&A on both the sell-side and buy-side mistakenly oversimplify valuation techniques in their transaction. As a result, they miss the mark on valuation. This results in transactions that never close, due to unrealistic, unmet expectations.