Business valuations are crucial during key times. They assist with selling a business, attracting investors, resolving disputes and divorces, and starting employee share schemes.

But here’s the reality.

Not all valuations are created equal.

In our work with SMEs at RJD Advisory, we regularly review business valuation reports that contain avoidable errors. Some are technical and some are spreadsheet errors. Others are simply a lack of commercial understanding. The impact can be significant either way. This includes overstated expectations, failed negotiations, tax risks, or unfavourable outcomes in disputes.

This article highlights common mistakes in business valuations and shows how to handle them correctly.

1. Confusing Enterprise Value and Equity Value

One of the most common issues is misunderstanding what the business valuation actually represents.

A business might be worth $5 million. This shows enterprise value, which reflects how much the operations are worth before looking at the capital structure.

To determine what the owner actually receives (equity value), you need to adjust for:

• Debt

• Shareholder loans

• Surplus cash

• Preference shares

Business owners often focus on the headline number. Later, they find their actual proceeds are much lower.

The key point: Always know what the number represents and what changes are still needed.

2. Ignoring or Misclassifying Shareholder Loans

Shareholder loans are frequently misunderstood or overlooked.

In simple terms:

• A loan owed to the company is an asset (increases value)

• A loan owed by the company is a liability (reduces value)

We often see business valuations that overlook shareholder loans or handle them inconsistently.

This becomes particularly important in:

• Business sales

• Partner buy-outs

• Family law matters

There’s another layer to think about: how the loan affects a person’s net financial position. This can lead to offsetting effects in some cases.

The key point: If it’s on the balance sheet, it needs to be properly assessed and reflected.

3. Relying on Generic Industry Multiples

“Businesses like this sell for 3–4x EBITDA.”

This is one of the most common statements we hear — and one of the most misleading.

Multiples only work when businesses are genuinely comparable. In reality, value is influenced by:

• Size and scale

• Customer concentration

• Recurring revenue

• Margin profile

• Key person risk

Two businesses in the same industry can have very different risk levels. This leads to different business valuations.

The key point: Multiples are a starting point, not a conclusion.

4. Using Reported Profit Instead of Normalised Earnings

Financial statements rarely reflect the true economic performance of a business.

Common adjustments include:

• Removing personal or non-business expenses

• Adjusting owner remuneration to market levels

• Excluding one-off or non-recurring items

We often see business valuations based on reported profit without due care in normalisation adjustments. This can either overstate or understate value depending on the situation.

A business showing a $500k profit might only have $350k in maintainable earnings after adjustments. In some cases, it could be much more.

The key point: Business valuations are based on sustainable earnings, not accounting profit.

5. Failing to Consider Key Person Risk

In many SMEs, the business is closely tied to the owner.

This may include:

• Customer relationships

• Sales generation

• Operational knowledge

If the business can’t run without the owner, it poses a risk for buyers. This risk should be included in the business valuation.

However, we often see business valuations that assume the business is fully transferable when that is not the case.

The key point: If the business relies on you, the business valuation should reflect that.

6. Applying Discounts Without Proper Justification

Discounts are often applied as standard percentages, but these are not “default” adjustments. For example, a discount for lack of control or lack of marketability.

They depend on the specific circumstances, including:

• Shareholder rights

• Liquidity of the interest

• Ability to influence decisions

Using random discounts without clear reasons can change results a lot. This is especially true in disputes or shareholder deals.

The key point: Every adjustment should be explained and supported.

7. Using Outdated Financial Information

Business valuations are time-specific.

We often see reports based on financial data that is:

• 12–24 months old

• Not reflective of current trading conditions

• Missing recent changes in performance

In a changing market, this can lead to a valuation that no longer reflects reality.

The key point: If the business has changed, the business valuation should be updated.

8. Ignoring Working Capital Requirements

Another common issue is focusing on a business valuation without considering working capital.

Most transactions are structured on a “normalised working capital” basis, meaning:

• The business is sold with sufficient working capital to operate

• Excess or shortfall is adjusted in the final price

If this is not considered, there can be a disconnect between:

• Valuation

• Sale price

• Actual cash outcome

The key point: Value and transaction structure go hand in hand; think of them together.

9. Overlooking ATO and Compliance Requirements

In Australia, business valuations are often required for:

• Employee Share Schemes (Division 83A)

• Tax restructures (CGT and small business concessions)

• Related-party transactions

The ATO expects business valuations to be:

• Reasonable

• Supportable

• Based on appropriate methodologies

Using incorrect or unsupported values can create compliance risk and potential disputes.

The key point: A valuation isn’t just a business task. It must also meet regulatory standards.

10. Treating Valuation as a One-Off Exercise

Many business owners only think about valuation when a transaction is imminent.

In practice, a business valuation should be viewed as an ongoing tool to:

• Track performance

• Identify value drivers

• Support strategic decisions

Regular business valuation reviews can highlight areas to improve before going to market.

The key point: A business valuation is not just about price; it’s about understanding your business.

Final Thoughts

Business valuations are powerful, but their effectiveness depends on proper execution.

The difference between a robust business valuation and a flawed one can materially impact:

• Negotiation outcomes

• Tax positions

• Dispute resolutions

• Strategic decisions

At RJD Advisory, we regularly assist clients by:

• Reviewing existing valuation reports

• Identifying errors and inconsistencies

• Providing independent, defensible business valuations

📞 Book a free consultation today to discuss a business valuation for your business and the next steps.