The 3 Most Common Valuation Mistakes

Miranda Kishel
3 days ago
2 min read

The Myth: "A business valuation is straightforward—just plug in the numbers."

Many business owners believe that valuing a business is a quick, formula-based process. They assume that if they know their revenue, profit, or a few industry rules of thumb, they can calculate what their business is worth. But this oversimplified mindset leads to serious missteps—especially when it’s time to sell, seek financing, or bring on a partner.

Why This Is Wrong

Business valuation is not a one-size-fits-all formula. It’s a professional judgment based on numerous qualitative and quantitative factors. Small mistakes—like using the wrong financial data or applying industry multiples without context—can result in valuations that are wildly inaccurate.

Here are three of the most common valuation mistakes business owners make:

1. Confusing Revenue With Value

Too often, owners say things like:

“My business brings in $1 million per year, so it must be worth at least that.”

That’s not how valuation works.

Value is based on a combination of factors, not just revenue. A business with $1M in sales and $50K in profit is worth far less than a business with $500K in sales and $150K in profit. What matters is how much sustainable, transferable cash flow the business generates—because that’s what a buyer is paying for.

2. Using the Wrong Earnings Number

Many owners base their valuation on net income from their tax return. But that number is often reduced by:

Owner’s salary
Depreciation
One-time expenses
Non-operating items

Valuation professionals can adjust earnings to reflect Seller’s Discretionary Earnings (SDE) or normalized EBITDA—a much more accurate picture of earning power.

Example: If your net income is $30,000 but you pay yourself $100,000 and had a $20,000 one-time legal expense, your true cash flow is closer to $150,000.

3. Ignoring Risk Factors

Valuation isn’t just about what you’ve done—it’s about how risky it is to maintain or grow your results. Common risk indicators that lower business value:

Customer concentration
Owner dependence
Weak financial records
Inconsistent cash flow
Lack of recurring revenue

If buyers perceive a higher risk, they apply a lower multiple—even if your financials look strong.

What Small Business Owners Should Understand Instead

Valuation is both art and science. It requires:

Clean, well-documented financials
Adjustments that reflect the business’s true earning power
Consideration of industry benchmarks, market trends, and risk

Getting the valuation wrong can lead to:

Undervaluing your business and leaving money on the table
Overpricing your business and scaring off buyers
Poor strategic planning due to false assumptions

Action Steps to Avoid These Common Valuation Mistakes

✅ Work with a certified valuation expert who understands your industry and small business dynamics
✅ Use adjusted earnings (SDE or EBITDA) as your starting point—not net income
✅ Document your assumptions and adjustments to support the final value
✅ Review risk factors that could lower your multiple and plan to address them
✅ Stay updated on industry and market trends that influence valuation benchmarks