Spotting valuation errors

Pablo Fernandez of the University of Navarra discusses some common mistakes that can trip up GPs when valuing companies.

When determining a company’s value (for potential acquisition, divestment or reporting purposes) the chance for error is high. Pablo Fernandez alongside his University of Navarra colleague Andrada Bilan identified 119 common errors in company valuations using real-world examples and research. Below they share a portion of their work. The full paper can be downloaded by clicking here

Confusing Value with Price. The value is always contingent on a set of expectations. A company normally will have different values for different buyers. If the price paid in an acquisition is equal to the value for the buyer, then the value created by the acquisition equals zero. On the other hand, do not forget that value is normally a number in an Excel worksheet, while price is very often cash. There is a difference between $20 million cash and $20 million written in an Excel worksheet.

A valuation is valid for everybody. A company will normally have a different value for the buyer and for the seller. Likewise a company will normally have different values for different buyers.

Confusing strategic value for a buyer with fair market value. The strategic value contains the extra value (normally due to additional cash flow generation) that a given buyer thinks that he may get from a company on top of what might be “normal” for other buyers.

Considering that the goodwill includes the brand value and the intellectual capital. Goodwill is merely the difference between the price paid and the book value. There are many cases (especially when interest rates are high) in which the price paid is less than the book value. 

Commissioning a valuation from an investment bank and not having any involvement in it. A fairly common error is to assign a valuation to an investment bank and wait for the valuation report. Obviously, any such valuation will merely be the value of the company according to the investment bank’s forecast (regarding the economy, the industry and the company) and the investment bank’s appraisal of the riskiness of the company.

Involving only the finance department in valuing a target company. To obtain a decent valuation, the sales, production, marketing, personnel, strategy, and legal departments also need to be involved.

Pablo Fernandez is a professor of finance at the University of Navarra in Spain. He can be reached at