How to spot a bad valuation

When you commission a business valuation, you're essentially purchasing a professional opinion on what your company is worth. But not all opinions are created equal. After reviewing hundreds of valuations over the years, certain patterns emerge that separate the wheat from the chaff.

Here's what to watch for when assessing whether you've received quality work or something that might cause problems down the line.

The most glaring red flags often appear in how the valuation approaches are applied and combined. Best practice suggests that you should use multiple valuation methods to cross-check your figures, but the execution matters enormously.

One particularly troubling practice involves mixing methodologies in ways that make little mathematical sense. Picture this: a valuator calculates enterprise value using one approach, then adds net asset value from another, and finally applies an arbitrary discount "for good measure." This isn't sophisticated analysis; it's mathematical confusion dressed up in professional language.

Double counting presents another common trap. When operational assets are already reflected in earnings or cash flows, adding them again through asset-based approaches inflates values incorrectly. The most frequent culprit here involves working capital, where valuators sometimes fail to consider whether current trading levels are sustainable or representative.

Revenue multiples also deserve particular scrutiny. When someone applies a blanket multiple without examining underlying margins, growth prospects, or capital requirements, they're essentially playing valuation roulette. A business generating 3% margins shouldn't be valued using the same revenue multiple as one generating 15%, regardless of industry averages.

Financial data forms the foundation of any valuation, yet outdated or unrepresentative information appears in reports more often than it should. If your business has undergone significant changes in the past year, whether operational improvements, market shifts, or structural modifications, these should be reflected in the analysis. Using three-year-old financial statements to value today's business is like using last season's weather forecast to plan tomorrow's picnic.

Some valuators treat discounts and premiums like items from a discount store catalogue, applying standard percentages regardless of specific circumstances. Fair market value is often derived from public stock data. So, business valuation professionals usually discount private business interests for their relative lack of marketability, but the application of these discounts requires careful consideration.

A discount for lack of marketability (DLOM) might be appropriate for a minority stake in a family business with restrictive shareholder agreements, but applying the same discount to a controlling interest in a profitable company with strong buyer demand shows a fundamental misunderstanding of market dynamics. The DLOM can range from 30% to 50% or more, depending on the specific circumstances of the investment, but these should be justified by actual circumstances, not pulled from a standard table.

Similarly, equity risk premiums and other adjustments should reflect the specific business being valued, not generic industry assumptions. Your technology consultancy deserves more nuanced treatment than whatever multiple the software sector averaged last quarter.

Public market comparables can provide valuable benchmarking, but they can also mislead when poorly selected. Using publicly traded companies as comparisons for small private businesses often creates false equivalencies. A listed technology company with global reach, professional management, and diversified revenue streams operates in a different universe from a local IT services firm with three employees and one major client.

Yet valuators sometimes make these comparisons anyway, then apply additional discounts to bridge the gap. The result is often a house of cards built on questionable foundations. True comparability requires examining business models, growth profiles, profitability patterns, and competitive positions, not just industry classifications.

Not every problematic valuation stems from incompetence or corner-cutting. Sometimes the issues are more subtle, involving presentation and communication rather than mathematical errors.

Overly complex language and excessive jargon can obscure rather than illuminate. Many business valuation reports include a general lack of support for subjective factors, or the analysis is only a mere regurgitation of facts with no discussion of 'why.' If you can't understand how the valuator reached their conclusions, the report's utility diminishes significantly.

Length doesn't automatically equate to quality. While comprehensive analysis requires thorough documentation, reports exceeding 100 pages often contain more padding than insight. The best valuations clearly explain their reasoning without burying it in unnecessary detail. If the valuator can't summarize their key findings and methodology in a few pages, question whether they truly understand what drives your business's value.

Most importantly, a good valuation should enhance your understanding of your business's value drivers and detractors. If you finish reading the report without gaining insights into what makes your company valuable or how that value might change, the exercise has failed its primary purpose.

Recognizing these red flags doesn't require becoming a valuation expert yourself. Instead, focus on ensuring your valuator can clearly explain their methodology, justify their assumptions, and demonstrate how they've accounted for your business's unique characteristics.

Ask questions. Challenge assumptions. Request explanations for any approaches or adjustments that seem questionable. A competent valuator will welcome this engagement and provide clear, logical responses. Those who respond defensively or dismiss your concerns might be revealing more about their work quality than they intend.

Remember that valuation is part art and part science. While opinions may vary, the reasoning behind those opinions should always be transparent, logical, and tailored to your specific circumstances.

The goal isn't perfection, it's professional competence applied with integrity to your particular situation. You deserve nothing less, and your business decisions depend on it.

 Here is your quick macroeconomic update for the past month:

• Fed rate cut (U.S.). The Federal Reserve trimmed rates by 25 bps to 4.00 – 4.25%, its first move in months. For SMEs, that means slowly easing borrowing costs, but variable debt and short-term credit will still feel expensive in the near term.

• Inflation squeeze (UK). UK inflation stayed high at 3.8% in August, keeping pressure on wages, food, and energy inputs. Small firms face thinner margins unless they can pass rising costs to customers.

• AI adoption trend (UK SMEs). Surveys show British SMEs are accelerating uptake of AI tools. Early adopters could gain efficiency and competitiveness, widening the gap with slower movers.

• Stable but tight credit (South Africa). The SARB held rates at 7% in September, leaving borrowing costs high but predictable. That stability helps planning, though banks remain cautious in lending to smaller firms.

• Easing price pressure (South Africa). Headline inflation eased to 3.3% in August, giving consumers more spending power. For SMEs, this could support demand and reduce input cost pressure in the months ahead.

Erika Moralez Perez, CEO and General Counsel at Iconos Group, reveals how legal frameworks can become strategic business assets rather than just compliance necessities. From breaking the operator mindset to building resilience for future transitions, Erika demonstrates why legal clarity is inseparable from business value and long-term success.

Listen Here.

Jim McLaughlin, Head of UK & Europe at bizval and Membership Adviser at the Federation of Small Businesses, shares hard-won insights from 35 years navigating financial services, fintech, and business governance. His refreshingly human perspective on AI's impact, the power of peer learning, and why failure builds the foundation for sustainable success offers real-world wisdom for anyone leading through constant change.

Listen Here.

Tracy Bech, serial entrepreneur and founder of 60Minute CFO, exposes the dangerous gap between looking profitable on paper and having cash in the bank. Her raw account of nearly growing her multi-million-dollar business broke reveals the critical financial ratios every owner should monitor and why understanding cash flow can make the difference between scaling successfully and scaling into trouble.

Listen Here.

Understanding market dynamics is essential intelligence for making informed decisions about your business's future. At bizval, we're committed to illuminating the often opaque world of small business transactions, cutting through market noise to deliver insights that actually matter to owners, advisors, and investors.

This year, we’ve published two reports, one for the USA and one for the UK, which aim to provide you with a sophisticated overview of where each market sits currently and what it means for your business.

Our 2025 US report uncovers what's really happening beneath the headlines, from financing constraints and regional deal patterns to what's driving (or dragging down) valuations across sectors. This report offers grounded insights for founders, advisors, and investors navigating an increasingly complex landscape.

Our 2025 UK report unpacks the current state of M&A for UK SMEs in 2025, examining how shifting demographics, technological disruption, and evolving investor priorities are reshaping the market. Focused on companies with £2m–£25m in turnover, it explores how macroeconomic trends, sector dynamics, and regulatory shifts are influencing exit and growth strategies.

Whether you're considering an exit, planning for growth, or simply want to understand where your market is heading, these reports provide the context and clarity you need – and we hope that you get a chance to check them out!

We've welcomed many new subscribers recently, so it feels like the right moment to use the last section of this newsletter to reintroduce ourselves and what we're about.

bizval exists to fix a fundamental problem in the business world: valuations are too often time-consuming, confusing, and expensive, leaving owners and advisors guessing when they need clarity most. Our mission is straightforward: deliver accurate, independent, data-driven valuations that are easy to understand, defensible when it counts, and completed faster than industry standard.

Whether you need support for a transaction, dispute resolution, tax planning, or strategic decision-making, we're designed to meet you where you are without the jargon or unnecessary complexity. At our core, we believe business owners deserve clarity, not confusion. If you’d like to explore a valuation for your business, get in touch with our team today.