Did you know that while valuation relies on financial models, the process itself is far from objective? Business valuation is often seen as a numbers game. You look at revenue, assets, market trends, and industry benchmarks. Plug in the right formula, and you get a number.
Well…Not really.
Two experts looking at the same business can come up with wildly different numbers. Why?
Because valuation isn’t just about math…it’s about perspective, judgment, and even psychology.
A company with strong financials today could be struggling in a year if it’s not adapting to changes. On the flip side, a business that seems undervalued might be sitting on a goldmine of future growth.
This is why valuation isn’t just about looking at the past – it’s about predicting what’s ahead.
1. The illusion of objectivity in valuation
Numbers feel reliable. They create an illusion of precision.
But when it comes to corporate or small business valuation, numbers don’t tell the whole story.
Two analysts might be looking at the same company:
One believes the industry will expand rapidly.
The other thinks a recession is coming.
Even if they use the same method, their assumptions will lead to different results.
And truth be told, there are many common factors that lead to discrepancies, such as:
Some valuators are optimistic, others are conservative. Small changes in projected revenue can make a big difference.
The same company may be valued higher in a booming market and lower in a downturn.
Some analysts see uncertainty as a reason to discount value. Others see it as an opportunity.
Valuation isn’t always neutral. An investment bank working on an IPO might give a high valuation to attract investors, while a buyer negotiating an acquisition may push for a lower number.
Even widely used business valuation methods have their flaws:
Discounted Cash Flow (DCF): Relies on future projections, which are just educated guesses.
Comparable company analysis: Assumes similar businesses should have similar values, but no two businesses are identical.
Asset-Based Valuation: Works well for companies with tangible assets but fails to capture brand value, customer loyalty, or intellectual property.
No method is perfect, and the final number is always a mix of calculations and human judgment. Human judgment is very, very important!
2. Valuation vs. perceived value
A business isn’t just worth what the numbers say.,.it’s worth what someone is willing to pay.
Consider two businesses:
A manufacturing company with millions in equipment but declining demand.
A software company with little physical property but a loyal customer base and strong recurring revenue.
Which one is more valuable?
The second business might not have as many assets, but its potential for growth is significantly higher. The manufacturing business, on the other hand, might have valuable equipment but struggle to generate revenue in a shifting market.
This is why valuation should consider intangible assets as well:
Brand reputation
Customer relationships
Innovation and intellectual property
Employee expertise and culture
Cases of perception-driven valuation
Tech startups with no profit but massive valuations
Companies like Uber and Tesla had sky-high valuations long before they were profitable.
Investors weren’t valuing them based on current earnings, but future dominance.
Brands that retain value despite financial struggles
Companies like WeWork collapsed financially but still held significant brand recognition.
A strong brand can make a struggling company more valuable than its balance sheet suggests.
Acquisitions driven by perception rather than numbers
Some acquisitions happen at inflated prices because the buyer sees strategic value.
Facebook’s purchase of Instagram for $1 billion seemed excessive at the time but turned out to be a bargain.
3. The human factor in business valuation
A business isn’t just a collection of assets and revenue streams. It’s run by people.
Yet, many valuations fail to consider the human element.
For example:
A strong CEO can drive a company to success. A weak one can cause it to fail.
High turnover can signal problems, while a strong team adds value.
Toxic workplaces often struggle in the long run, no matter how good their numbers look.
Think about companies that thrived after leadership changes (like Apple when Steve Jobs returned) versus those that declined due to poor management (like many retail giants that failed to adapt to e-commerce).
If a business is overly dependent on one leader, what happens if they leave? If employees aren’t motivated, will the business still perform as expected?
Ignoring these factors can lead to misleading valuations.
A business with great numbers but weak leadership is or could be a risky investment.
The real reason business valuations matter (and when they don’t)
Most businesses aren’t looking for a valuation just for fun. They need it for a reason. But the reason behind the valuation often dictates how the number is calculated.
There are different valuation goals and different numbers.
For selling the business: The owner wants the highest possible valuation. Buyers want the lowest. The final number depends on negotiation.
For fundraising: Investors want growth potential. The valuation will lean heavily on future projections.
For financial reporting: Accountants may focus on book value and tangible assets.
For legal matters (divorce, disputes): Courts may rely on a neutral, conservative valuation method.
This is why two different valuations for the same business can exist at the same time…because they serve different purposes.
When valuation doesn’t really matter
Some businesses get caught up in chasing a high valuation, but in reality, the number isn’t always important.
A startup raising money at a high valuation may struggle to justify it later.
A small business owner focusing on selling might accept a lower valuation in exchange for a quicker, smoother sale.
A company’s market value can change overnight due to external factors. Meaning today’s valuation might not hold tomorrow.
Final thoughts
Business valuation is often treated as a definitive measure of a company’s worth.
But in reality, it’s a mix of financial data, market perception, and human judgment.
The same business can have different valuations depending on who’s asking AND why.
Perception plays a huge role in determining a company’s value.
So, a smarter approach to valuation looks at the bigger picture. It considers future potential, not just past performance.
It asks tough questions and challenges assumptions. Most importantly, it recognizes that value isn’t just about what’s on paper…it’s about what the business can become.