As important as valuating your business is before you decide to sell, you don’t want to run into making some common mistakes when you’re trying to estimate.  

 

Make sure that you pay attention to the many factors that exist if you are going to be selling. Specifically, you want to avoid doing the following:  

 

Projecting Unrealistic Growth

This is the most common mistake that’s made when a business determines their business valuation. If you are projecting aggressive growth without any support from market research and analysis, a company can carry high risk factors that could prompt an increase in the discount rate - required rate of return.  

 

Using an Earnings Multiple

You will be faced with an increase in the earnings base if you decide to use a fixed discount or capitalization rate with many different streams – net income up to pre-tax income up to EBIT up to EBITDA are some of the examples.  

 

Utilizing EBITDA

If you decide to use EBITDA, you will run into dangerous waters based on two variables – above- average projected working capital and capital expenditure requirements. With no exceptions, you should always perform a cash flow analysis.  

 

Remember that you’re only giving a short-term projection when you eliminate taxes, depreciation and amortization. You know that eventually the potential business owner is going to have to start to pay taxes; replace depreciated tangible property and amortize the intangibles.  

 

Comparable Sales between Companies

Many buyers, sellers and intermediaries will rely solely in comparable sales when valuating a business. The obvious problem that arises is that no two companies are going to be alike in both financial and operation structures.  

 

Therefore, only use the market or comparable company method if the research is thorough and done correctly. This will assure that the businesses being used are in fact similar in structure to the one being valued.  

 

Adjusting Earnings to Unrealistic Levels

Finally, when estimating the value of a mid-market company, avoid doing “add-backs” or adjustments to the earnings stream. The two most common adjustments are non-recurring income or ones regarding expense and officer salaries.  

 

Many sellers look to add back actual business expenses and leave non-recurring income, when in fact it should be the other way around.  

 

In addition, many sellers of mid-market companies tend to adjust officer salary to below industry averages. When adjusting the officer salary, it is not what a new replacement officer will want. You must base on the responsibilities of that officer and what other ones in similar positions are being paid. The question that you should ask: Would you take a $50,000 annual salary to run a $10 million company? No.