When a business owner receives a valuation report, whether it's forty pages or a hundred and forty, they almost always flip straight to the conclusion. The number. The figure that's supposed to tell them what their life's work is worth.
We understand the impulse. But reading a valuation report that way is like reading a contract by skipping to the signature page. The number at the bottom only means something if you understand how it was built, what assumptions hold it up, and where reasonable people might disagree.
A valuation report is not a verdict. It is an argument. Your job, as the business owner, is to understand whether it's a good argument or a lazy one.
The normalisation schedule is where the real story lives
If there is one section that deserves your complete attention, it is the normalisation schedule. This is where the valuer adjusts historical earnings to strip out items that are non-recurring, owner-specific, or unrepresentative of what a buyer would experience going forward.
Common adjustments: your above-market salary (if you pay yourself $400,000 but a replacement GM would cost $250,000, the difference gets added back). Related-party transactions benchmarked to arm's-length rates. One-off costs like litigation, relocation, COVID grants. Discretionary spending like prestige car leases or the corporate box.
Here is what matters: small changes to normalised earnings cascade through the valuation. If the capitalisation multiple is 4x, every dollar you add back in normalisation adds four dollars to the value. Every dollar you fail to identify costs you four.
This is why we tell clients to be involved in the normalisation process from the start. No valuer, no matter how competent, knows your business as well as you do. They will miss things. They will also include things that deserve scrutiny.
The discount rate has enormous power over the conclusion
In a discounted cash flow valuation, the discount rate is the assumed rate of return a hypothetical investor would require given your business's risk profile. For a mid-market private business in Australia, it is not unusual to see rates in the range of 18% to 30%.
That range is enormous, and the impact on value is equally enormous. A business generating $2 million in annual free cash flow: at a 20% discount rate, it is worth $10 million. At 25%, $8 million. At 30%, $6.7 million. A $3.3 million swing driven entirely by how risky the valuer judges the business to be.
The company-specific risk premium is where valuers exercise the most judgment, and where you should exercise the most scrutiny. What factors are they citing? Customer concentration? Key-person dependency? Those might be legitimate. But if the risk premium is a round number with no supporting rationale, you are looking at professional guesswork dressed up in a formula.
How to spot a weak report
Not all valuation reports are created equal. We review these documents constantly, and there are telltale signs of a report produced to a price rather than to a standard.
Generic comparable companies that bear no meaningful resemblance to your business: different industry, geography, scale. A discount rate presented as a single number with no breakdown of how it was constructed. Reliance on a single methodology without explaining why alternatives were rejected. No sensitivity analysis showing what happens when key assumptions change. And boilerplate caveats longer than the actual analysis, produced to manage the valuer's risk rather than inform your decisions.
Tax valuations and sale valuations are not the same exercise
A valuation prepared for the ATO assumes a hypothetical transaction between a willing but not anxious buyer and seller. It does not contemplate synergies or competitive tension. A valuation prepared to support a sale process should consider what specific buyers might pay, including strategic value and the dynamics of a well-run process.
We regularly see 20% to 40% differences between a tax-purpose valuation and the price achieved in a properly managed sale. They are answering different questions.
The danger is commissioning one and treating it as the other. Owners who use a tax valuation as their asking price are often leaving substantial value on the table. And owners who take an optimistic sale-process view to the ATO are inviting audit attention.
The bottom line
Read the assumptions. Challenge the normalisation. Interrogate the discount rate. Ask why those comparables were chosen. Understand whether the basis of value (controlling interest or minority interest, enterprise value or equity value) matches your actual circumstances.
A valuation report is a tool. It is not a guaranteed sale price. It is not a crystal ball. And if you're not sure whether what you're reading is a thorough piece of professional analysis or an expensive rubber stamp, ask someone who reads these every week.