I used to refer to this phenomenon as the “braaivleis valuation” in recognition of an event I once witnessed which involved a lot of Rum, Coke and no short supply of Zamalek. In furtherance of our international acclaim, it will now be referred to as the “social valuation”.
In brief, it refers to the habit of people haphazardly staking their future financial well-being on the thumb suck valuation technique involving the simple multiplication of two numbers, “because it worked for Alan”.
This video takes the onus away from the written word in explaining the process, and showing where it goes wrong.
https://www.youtube.com/embed/34FPt6omiiE
Business values fail in a sort of diluted way in which actual business sales fail. The latter may suffer because of an insurmountable problem discovered in the due diligence, or something surfacing which does not fit in with the plans of the purchaser. The former, because of the probability of these factors causing sales to be compromised.
The business valuation is therefore an early warning system of where things need to be improved before taking the business to market, and a valuation should be conducted for each business on a regular basis – annually, if possible.