Common Valuation Mistakes and How to Avoid Them

Valuation is both an art and a science. It’s the cornerstone of investment decisions, mergers and acquisitions, fundraising, and strategic planning. Yet, even seasoned professionals fall into common traps that can distort the true worth of a business.

In this guide, we explore the most frequent valuation mistakes and how to avoid them, drawing from the deep expertise of two industry leaders: David Brown, Managing Partner at dbrownconsulting, and Gbolahan Ashagbe, Associate Director at KPMG. With decades of experience across Africa’s financial landscape, their insights are rooted in real-world practice, not just theory.

Why Valuation Matters

Valuation is more than just a number, it’s a narrative. It tells the story of a business’s potential, its risks, and its future. Whether you're preparing for an acquisition, pitching to investors, or assessing internal performance, a flawed valuation can lead to poor decisions, missed opportunities, or even financial loss.

The Three Core Valuation Approaches

Before diving into the mistakes, it’s important to understand the foundational methods:

• Income Approach: Values a business based on its future cash flows, discounted to present value.
• Market Approach: Compares the business to similar companies using valuation multiples.
• Asset-Based Approach: Calculates value based on the business's net assets.
  Each method has its place, but each also comes with pitfalls if misused.

The Most Common Valuation Mistakes

1. Misaligned Forecast Horizons

Many professionals use a standard five-year forecast without considering the business’s lifecycle. For startups or capital-intensive projects, this can be misleading. Align your forecast period with the business’s growth phase. For example, oil and gas projects may require 20–30-year models based on asset life and licensing terms.

2. Overly Optimistic Assumptions

It’s tempting to project rapid growth, but unrealistic revenue or margin assumptions can inflate valuations. This is especially common when management provides aggressive forecasts without grounding them in market data. Always sense-check assumptions. Use historical data, industry benchmarks, and scenario analysis to validate projections.

3. Ignoring CapEx and Working Capital Needs

Growth requires investment. Yet many models show rising revenues without corresponding increases in capital expenditure or working capital. Tie growth to operational needs. If revenue is increasing, what infrastructure, inventory, or staffing is required to support it?

4. Misusing Terminal Value

Terminal value often accounts for the majority of a DCF valuation. Applying an arbitrary growth rate or ignoring inflation can skew results. Use nominal growth rates that reflect long-term economic trends. For Nigeria, consider inflation-adjusted projections from credible sources like the IMF or EIU.

5. Applying the Wrong Discount Rate

Using a generic discount rate or miscalculating beta can distort the risk profile of a business. Customize your discount rate using CAPM, adjusted for country risk, industry beta, and capital structure. Match nominal cash flows with nominal discount rates.

6. Choosing the Wrong Valuation Multiple

Not all businesses should be valued using EBITDA. For example, banks and insurance companies are better assessed using price-to-book or dividend discount models. Understand the industry. Use the multiple that best reflects the business model and regulatory environment.

7. Overlooking Off-Balance Sheet Items

Deferred taxes, lawsuits, and unrecorded IP can significantly affect valuation. These are often buried in the notes to financial statements. Dig deeper. Ask questions. Review disclosures and consult with auditors or legal teams when necessary.

The Role of Storytelling in Valuation

Valuation isn’t just about spreadsheets, it’s about telling a coherent story. A good valuation explains how a business creates value, what risks it faces, and what assumptions underpin its future.

As David Brown puts it, “If the story doesn’t make sense, the numbers won’t either.” And Gbolahan Ashagbe adds, “Understanding the business model, market, and management team is just as important as the math.”

Learn Valuation in a Structured Manner at dbrownconsulting

If you’re serious about improving your valuation skills, there’s a structured way to do it.

dbrownconsulting offers a comprehensive valuation training program designed for finance professionals, analysts, and business leaders. The course covers:

• The four cornerstones of value
• IFRS 13 and fair value measurement
• Intrinsic vs. market-based valuation
• Real-world case studies and modeling exercises

If you're new to valuation or looking to refine your expertise, this training will give you the tools and confidence to value businesses accurately and credibly.

The training is delivered virtually, making it accessible from anywhere in the world. Participants benefit from live sessions, hands-on assignments, and expert feedback. Enroll Here