Common Errors Found in Valuation Reports

Errors in valuation reports can be costly.  Minimize the risk by hiring a firm with extensive valuation experience and become familiar with common mistakes.  Vice President Rachel Flaskey collaborated with Sageworks to present a practice aid on 14 common errors found in valuation reports. 

If you have questions or concerns about a valuation report, Chartwell can help by providing an independent review.  Contact us today to learn how we can provide peace of mind on the analysis and conclusions in your report.

 

INCOME APPROACH 
  1. Using a pre-tax cash flow in either the single-period capitalization method or the discounted cash flow method, but not adjusting the discount rate to its pre-tax equivalent
  2. Using debt-free cash flow (cash flow to the firm), but using only the required return on equity as the discount rate rather than a weighted-average cost of capital
  3. Using a long-term growth rate significantly above the projected growth in the economy
ASSET APPROACH
  1. Not considering built-in gains tax on the appreciated asset values of an income tax paying entity or an S-corporation that is still within its look back period
  2. Not considering or separately valuing the intangible assets owned by the business, such as developed software or patents
  3. Assuming the value of the liabilities is equal to their book value without performing additional analysis
MARKET APPROACH 
  1. Applying private company transaction multiples without reviewing the transactions for comparability
  2. Using dated transaction data when conditions in the industry have changed significantly from the time the earlier transactions occurred
  3. Using transactions occurring after the valuation date
  4. Not understanding adjustments made to market data
  5. Failing to show the transactions and multiples relied upon in the report
OTHER
  1. Using a lack of control discount on the income approach when a non-controlling cash flow stream was used to calculate the value
  2. Not reconciling the marketability discount to available studies or quantitative methods
  3. Failure to explain why certain valuation methods were chosen or rejected

Click here to download the .pdf version.