Problems with the Standard Approach to Business Valuation

The problems with the Traditional Business Valuation Methods and the individual approaches are numerous. As you review them individually you develop questions about how to address the unique factors and special consideration for your company.

Typically, Discounted Cash Flow analyses are done in an overly simplistic manner using accounting templates, not taking into consideration the unique complexities of your actual business cash flows.

Choosing appropriate discount rates is also difficult, and too often firms use rules of thumb instead of the appropriate financial analysis to determine the optimal rate. A change in discount rate of as little as a few basis points, affected over years of projections, can drastically alter the value of a firm.

The Asset Approach best serves companies with large amounts of equipment and machinery. Modern firms, especially those in the fields of biotech, consulting, service or technology, possess relatively few hard assets. Their assets are more likely to be business processes, patents, copyrights or other pieces of intellectual property that simply cannot be purchased on the open market. If the primary assets of the business cannot be replaced, then the firm cannot be appropriately valued with this model.

The variance in the outcomes for the calculations of the Discounted Cash flow and the Asset Models tends to build challenges into Comparable Firm method. No two firms are ever entirely comparable. Even two fab shops in the same town can drastically differ in location, quality, employment expenses and other important costs and benefits. Making vague comparisons to “similar” companies does no service to those interested in knowing the business valuation of their firm.

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