ABV common mistakes
ABV · Understand the traps and how to avoid them.
Applying the marketability/control adjustments in the wrong direction or double-counting them (e.g., discounting an already minority, non-marketable interest for lack of control and lack of marketability again, or adding a control premium to a controlling-interest value).
Candidates memorize 'DLOM and DLOC' as a checklist and apply them mechanically without first identifying the subject interest's level of control and marketability and the basis of the comparable data.
What to do instead
Before adjusting, state in one sentence what the subject interest is (control vs. minority, marketable vs. non-marketable) and what basis the underlying value indication reflects; then apply only the adjustment that bridges the two. Sanity-check direction: less control and less liquidity must lower value, never raise it.
Mixing cash flows and discount rates on inconsistent bases-discounting pre-tax cash flows at an after-tax WACC, using nominal rates on real cash flows, or applying a perpetuity growth rate to a nominal stream that exceeds the nominal growth ceiling.
Time pressure leads candidates to grab the WACC from one place and the cash flow projection from another without reconciling the tax and inflation conventions.
What to do instead
Write the cash-flow definition (pre- or post-tax, nominal or real, debt-free or equity) next to the discount rate before calculating, and convert one to match the other. Verify terminal growth is below the long-run nominal growth rate of the economy.
Building the WACC with book-value weights, using the coupon rate instead of the yield/market cost of debt, or forgetting to tax-effect the cost of debt.
The balance sheet is the most convenient source of weights, and the coupon is printed on the debt, so candidates use both without adjusting to market values or the current marginal cost of capital.
What to do instead
Use market-value (target or industry) weights, derive the pre-tax cost of debt from current yields or a risk-free rate plus a credit spread, and multiply by (1 − tax rate). Recompute if the weights shift materially.
Selecting guideline companies or transaction comparables on surface similarity (same SIC code) while ignoring size, growth, margin, leverage, and geographic differences-then applying the median multiple with no adjustment or discussion.
Screeners return a list and candidates treat it as authoritative, and adjusting multiples feels subjective and hard to defend under exam constraints.
What to do instead
State explicit selection criteria, document why each comp qualifies, and either adjust the multiple for the key differentiator (e.g., growth or margin) or explain why the median is still representative. Note that transaction multiples embed control and synergies while trading multiples do not.
Treating a valuation conclusion as a single point estimate-reporting one number with no range, no reconciliation of methods, and no explanation of why one method was weighted more heavily.
Candidates think a precise-looking single figure signals competence, and they run out of time before writing the reconciliation narrative.
What to do instead
Present a range, weight the methods with stated reasoning (e.g., availability and reliability of data, nature of the entity), and explain the reconciliation. A defensible report shows the analyst's judgment, not just arithmetic.
Producing a report that omits mandated disclosures-intended use and users, the standard of value, the premise of value, the valuation date, assumptions and limiting conditions, and the analyst's signature/credentials.
Candidates focus on the numbers and treat the report as a cover sheet for the calculation, forgetting that a valuation is a communication governed by standards.
What to do instead
Before finalizing, run a checklist against the applicable standard (e.g., USPAP, IVS, AICPA SSVS) covering scope, standard and premise of value, date, sources, assumptions, limiting conditions, and signatory. If a required element is missing, the report is deficient regardless of the number.
Confusing the standard of value-using fair market value, fair value (financial reporting), investment value, or intrinsic value interchangeably, or applying a strategic/premise-of-value assumption in an FMV engagement.
The terms sound similar and candidates default to 'market value' without checking which standard the engagement specifies.
What to do instead
Identify the standard of value first and let it drive the assumptions (e.g., FMV assumes a hypothetical willing buyer/seller, no synergies, and typically a marketable, control-agnostic basis; investment value may include synergies). State the standard explicitly in the report.
Ignoring or misapplying the valuation date-using data available after the valuation date, or failing to reflect facts known or knowable as of that date (e.g., a pending lawsuit or announced deal).
Candidates use the latest data they can find because it feels more 'accurate,' forgetting that hindsight is not admissible in a valuation as of a prior date.
What to do instead
Anchor all inputs to information known or knowable as of the valuation date. If later events are used, disclose and justify them. Confirm the date in the report matches the engagement.
Breaching independence or objectivity-accepting a contingent fee, valuing an interest the analyst owns, or letting the client dictate the conclusion-while still presenting the work as an independent valuation.
Candidates underestimate how professional-ethics rules interact with engagement terms and treat ethics as a soft topic separate from the technical work.
What to do instead
Screen the engagement for conflicts and prohibited fee arrangements before accepting it, document the screening, and disclose any threats and safeguards. If independence cannot be maintained, decline or clearly label the work as not independent.
Failing to document sources, assumptions, and the reasoning trail-presenting a conclusion with no support for key inputs (e.g., the discount rate build-up, the growth assumption, the DLOM support).
Under time pressure candidates jump to the answer and skip the audit trail, assuming the reviewer will trust the result.
What to do instead
For every material input, record the source, date, and rationale, and show the build-up (e.g., risk-free rate + ERP × beta + size/company-specific premiums = cost of equity). A conclusion is only as defensible as its documented support.