Learn from costly errors that may impact business owners in negotiations, tax penalties, and legal proceedings. These real-world mistakes show why professional valuations may be essential for important decisions.
IRS penalties for inadequate appraisals
Poor negotiating position due to inaccurate valuation
Court rejection of inadequate valuations
Poor business decisions based on wrong value
Basing valuations on financial statements that are 12+ months old or using outdated market multiples.
May result in significant valuation variance
A tech company valued using 2022 multiples in 2024 market conditions resulted in substantial overvaluation.
Applying generic valuation methods without considering industry-specific multiples, cycles, or regulations.
May result in significant accuracy loss
A healthcare practice valued using retail multiples undervalued the business substantially due to regulatory licensing value.
Not adjusting for one-time expenses, excessive owner compensation, or non-operating income/expenses.
May result in significant valuation error
A manufacturing company's valuation was understated substantially due to uncounted owner perks and one-time legal expenses.
Applying fair market value methods when fair value or investment value is required by law or situation.
Legal challenges and do-overs
A divorce case required revaluation when DIY fair market value was used instead of required fair value standard.
Applying or failing to apply discounts for lack of marketability or control premiums incorrectly.
May result in significant value swing
A marketability discount applied to a controlling interest reduced value inappropriately.
Selecting only favorable comparables or using companies that aren't truly comparable in size, industry, or markets.
Biased and indefensible results
Using only high-growth tech comparables for a traditional service business inflated value substantially.
Using overly optimistic or pessimistic growth rates without proper support or industry benchmarking.
Exponential valuation errors
An unrealistic perpetual growth rate inflated a service company value substantially.
Confusing enterprise value with equity value, or incorrectly handling debt and working capital adjustments.
Fundamental valuation errors
A buyer paid substantially more thinking they were buying enterprise value when it was quoted as equity value.
Results may vary based on specific circumstances. Professional valuations follow established standards.
Basic calculators can't account for industry nuances, adjustments, or complex capital structures.
Economic cycles, interest rates, and industry trends dramatically affect valuation multiples.
Using fair market value methods when investment value or fair value is legally required.
Inadequate support for assumptions and methods leads to challenges in court or audits.
Owners often overvalue due to emotional attachment or undervalue due to modesty.
Rushing valuations or using wrong valuation dates can significantly impact results.
No independent review of methods, assumptions, or calculations before finalizing.
A family manufacturing business needed a valuation for estate planning. The family hired a non-specialist to save money, who made several critical errors.
Professional valuation could have identified these issues before closing, potentially preventing the costly consequences and delays.
Work with credentialed valuation professionals (CVA, ASA, CPA/ABV, CFA) who have proper training and experience in your industry.
Clearly communicate the purpose and required standard of value to ensure appropriate methodology. Following recognized valuation standards (NACVA Professional Standards, USPAP, AICPA SSVS).
Ensure financial statements, market data, and comparable analysis reflect current conditions.
Professional valuations use multiple approaches and methods to cross-check and validate results.
Choose valuators with specific experience in your industry who understand unique factors and multiples.
Comprehensive reports with detailed methodology, assumptions, and supporting data for legal defensibility, in accordance with professional valuation standards.
Professional peer review and quality control processes catch errors before finalization.
Professional valuators provide expert testimony and support if the valuation is challenged.
Avoid costly valuation errors by working with a Certified Valuation Analyst who understands these pitfalls and how to prevent them
Examples are illustrative. Actual results depend on specific facts and circumstances. Professional valuations follow established standards ensuring defensibility and reliability.