Bermuda Triangle Of Valuation: These 3 Issues Can Sink A Business Valuation
— August 16, 2015
By Aswath Damodaran
The Bermuda Triangle of Valuation
It is true that valuation, at its core, is simple and should be easy to implement, but it is often mangled in practice. While some valuation malpractice reflects a misunderstanding of the basic principles of valuation, I think that the bigger culprit is the valuation process and three problems that are embedded in it: the biases that analysts bring into their valuations, their unwillingness to grapple and deal with the uncertainties that they face when valuing businesses and the ease of access to data and tools that allow them to build in complexities into valuation models.
In an ideal valuation, you would start with no preconceptions about the companies that you are analyzing and then make your best judgments on how much value to attach to them. In practice, you almost never start with a clean slate, as everything that you have read or heard about a company will have already created perceptions about it that will affect your valuation. Ironically, the more you learn about a company and the more exposure you have to its management, the more entrenched the bias becomes. This bias is made worse if you are being paid to do the valuation as an appraiser, banker or expert witness, since the client paying for the service often has a “value” in mind that he or she would like to see, and you will feel pressure, either implicitly or explicitly, to deliver that value. At the risk of stating the obvious, all valuations are biased, with the only questions being to what degree and in which direction.
Read full article as published in Forbes
Aswath Damodaran is the Kerschner Family Chair in Finance Education.