Business valuation combines art and science. We identify the five most frequent errors and how to avoid them to achieve a valuation that reflects reality.
Business valuation is perhaps the most important exercise in any transaction — and the most susceptible to error. Two competent valuators can reach reasonably different figures analysing the same company. But there are errors that should not be committed, yet we see with troubling frequency.
Adjusted EBITDA is the most widely used valuation base in the middle-market. Adjustments have a legitimate function: normalising extraordinary, non-recurring, or unrepresentative items. But adjustments have become, in too many cases, a tool to artificially inflate EBITDA. We have seen sale memoranda where adjustments represent more than 50% of the resulting EBITDA. Legitimate adjustments include personal expenses charged to the company, excessive owner compensation, truly extraordinary costs, and transaction costs. What we do not accept: projections disguised as adjustments, costs that will always recur, and individually reasonable adjustments whose cumulative effect is absurd.
Not all multiples are equal. Common mistakes include comparing with non-comparable transactions, ignoring EBITDA quality, using multiples from different sectors, and not adjusting for size. A well-documented size premium exists: larger companies command higher multiples than smaller ones in the same sector.
Enterprise Value is not the same as the price the seller receives (Equity Value). The difference is net financial position: debt, cash, pension commitments, working capital. We have seen valuations that completely ignore this bridge.
Transaction databases only record completed deals, not those that were attempted and failed. This means median multiples are biased upward, since lower-multiple transactions are more likely to not close and therefore not appear in statistics.
The terminal value typically represents 60-80% of total DCF value. Excessive perpetuity growth rates, hockey-stick projections, and inadequate discount rates are the most frequent errors.
Use multiple methods for triangulation. Cross-check against market reality. And engage an independent professional — a valuator who charges based on results is not independent. Valuation is not science, but neither should it be fiction. With rigour, transparency, and common sense, you can arrive at a figure that reasonably reflects a company’s value.
Valuation is not an academic exercise — it is the foundation upon which the entire transaction is built. An incorrect valuation can lead to overpaying (destroying value from the outset), to unrealistic seller expectations (derailing negotiations before they begin), or to missed opportunities (walking away from companies that would have been excellent investments at a slightly different price).
The middle-market presents particular valuation challenges that do not exist in public markets or in large-cap private equity. Information is less standardised, comparables are harder to find, and the idiosyncratic characteristics of each company — founder dependence, client concentration, local market dynamics — have a disproportionate impact on value.
Moreover, the emotional dimension of valuation in the middle-market is far more intense than in institutional transactions. The seller has typically built the business over decades and has an understandable emotional attachment that does not translate neatly into financial metrics. The buyer must navigate this emotional landscape while maintaining analytical discipline.
The most reliable approach to valuation in the middle-market combines multiple methodologies, each serving as a check on the others. Transaction multiples provide a market-based reference. Discounted cash flow analysis captures the company’s specific growth and risk profile. Asset-based valuation provides a floor. And market-testing — engaging with potential buyers to gauge real interest — provides the ultimate reality check.
No single methodology is sufficient, and the art of valuation lies in synthesising insights from multiple approaches into a range that reflects both the company’s intrinsic characteristics and the market’s current appetite. At Blue Mountain, we use multiples as a starting point and then adjust — upward for companies with exceptional characteristics, downward for those with identified risks — based on deep operational analysis.
The most important quality in a valuator is intellectual honesty: the willingness to acknowledge uncertainty, to present ranges rather than point estimates, and to explain clearly the assumptions underlying any conclusion. A valuation that presents false precision is worse than one that honestly acknowledges the range of reasonable outcomes.
By Blue Mountain Capital
By Blue Mountain Capital
By Blue Mountain Capital
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