What is Double Dipping (Valuation Error)?
The Short Answer
Double Dipping (Valuation Error) explained simply
Double dipping is a common mistake in business valuation. It happens when you account for the same financial item or risk more than once. For example, if you adjust the income statement for a specific expense and then also adjust the capitalization rate for the same expense, you are double dipping. This leads to an inflated or deflated business value, making the valuation inaccurate.
Real-World Example
The Over-Adjusted Salary
Imagine a business owner who pays themselves a salary that is higher than market rate. In a valuation, this salary might be adjusted down to a market-rate salary to reflect the true profitability of the business. If the valuation expert then also increases the capitalization rate because of this "excess" salary, they are double dipping. The adjustment should only happen once, either in the income statement or the capitalization rate, but not both.
Why this matters
Double dipping makes your business valuation wrong. It can lead to you overpaying for a business or underselling your own. An accurate valuation is key for fair deals and good financial decisions.
Always review your valuation adjustments carefully. Make sure each item is only accounted for once. This prevents errors and ensures a fair value.
Always review your valuation adjustments carefully. Make sure each item is only accounted for once. This prevents errors and ensures a fair value.
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