Biases in Valuations

Biases in Valuations

While doing business valuations for more than ten years and analysing multiple mergers and acquisitions, i have discovered the following regarding business valuations:

1)All valuations are biased. The only question is how much, who is doing the valuation, and how much they get paid. For instance, the valuation would have a strong bias if you depend on a banker to value a target company you are looking to acquire, and the banker’s success fee depends on the deal closure.

2)There are no precise valuations; the higher the uncertainty, the higher the payoffs. Thus, valuing a start-up/young company would yield higher rewards than valuing a matured business.

3)One’s valuation skills are inversely proportional to the complexity of the valuation models. Analysts with a firm grasp of valuation fundamentals develop models on fewer assumptions (focusing only on the value drivers). Therefore, simple valuation models perform much better than complex models with a massive number of inputs.