BUSINESS VALUATION: WHAT ARE MY OPTIONS?

When deciding what type of company valuation you need, there are few options available.

It usually depends on your specific situation, company size, information available (specifically when the valuation is ordered by an investor) and type of transactions, as well as the expected audience and negotiations.

The purpose or transactions for which you may want a valuation are: internal assessment and value maximisation, equity fundraising, debt financing in cases of large transactions, introduction of new shareholders, exit of shareholders, squeeze-out, tax reasons, compensation, damages, sale of company, a merger or joint venture. The most common reasons are equity fundraising and the sale of the company.

Do you always need a valuation? No, the valuation helps you during negotiations, so if you already have a good idea of what your company is worth, if the person/company you negotiate with has carried out their own valuation and you trust them, it may not be necessary, but it is good to have one done to be prepared. In the majority of cases, however, the valuation of a company is not straightforward, even for listed companies, when considering synergies with an acquiror. In cases of tax reporting, squeeze-out, compensation, damages and generally for cases of litigation, or for high-risk transactions, an official valuation becomes necessary.

For simple internal assessments and small fundraising rounds, a valuation in excel can be sufficient. If it is difficult for you to explain it in a negotiation meeting where your consultant is not present, you can also ask your valuer to prepare a short presentation explaining simple assumptions that can be understood by those who are less familiar with valuations. However, this is not a report, and in this case you cannot attribute an official valuation result to your valuer (because you can edit this), unless you receive a standard signed report. Also, remember that if you considerably change the financial plan, the linked valuation result will no longer be valid or consistent and it will be considered unreliable by the investor: this is because the valuation discounting and type of exit are calculated based on your initial financial plan, and if the cash flows change, the risk associated with the cash flows and the exit assumptions need to be updated.

When your budget is limited, when a report is useful to understand how the value was calculated, and in the case of low-risk transactions, you can ask for a Calculation Engagement. This is typically a short-medium report, signed by the valuer but with no liability. The market research efforts would be low-medium, and the sophistication of the valuation may be medium-high, as negotiations in many cases are unlikely to go into the smaller details. In this case, clients have more freedom to give indications to the valuer on how they want the company to be valued: however the valuer will still apply recognised methods and be committed to producing a reliable value. The valuer may also request less information. This reports is very popular because it is more affordable and also provides you with a reliable value signed by a valuer.

A Valuation Engagement is understood as the official valuation report, typical in cases of high-risk transaction, and for larger exits. There are no strict requirements about the qualifications of the valuer, if any, especially because these are countries where valuation qualifications are rare even among experienced professionals, in many countries in Europe for example. In fact, many valuations are carried out with low-quality methods due to the lack of these requirements. However, as the number of qualified professionals increase in a country, so are the client and investor requirement to see a report signed by a qualified professional. There are also very few countries where specific national qualifications are required, almost none actually, making it possible for you to hire a foreign professional who has a recognised qualification (in real estate valuations, this is the opposite, as most countries require locally qualified professionals for official reports). In cases of litigation, tax and other specific high-risk transaction, however, it’s best to hire someone local, as they may have to accompany you through negotiations or in court on a regular basis, and they may also be more familiar with the local court system as well as have more influence.

Valuation Engagement Reports are usually twice as comprehensive, describe the valuation theory in more detail, include a deeper research into the market and company. The valuation methods used may more advanced, with additional methods used, even though this does not mean that the valuation result will necessarily be different from that of a Calculation Engagement. The valuer may request additional documents before granting a valuation opinion, and as a client you may have less possibilities to tell the valuer to have something included or excluded from the valuation, as they are bound by professional standards to come up with a reliable value and report. In this case, you can hire a valuation professional as a neutral appraiser, or in a consulting capacity during a negotiation.

For valuation reports, I follow the guidelines of NACVA in the Unites States and of its sub-chapter EACVA in Europe. Additionally, I consult the International Valuation Standards (IVS), other valuation standards prevalent in the US vs Europe, the International Private Equity and Venture Capital Valuation Guidelines (IPEV), German, Austrian and Italian valuation standards, as well as other countries when they exist.

Similar standards are used in different European countries, with slightly different terminology, while in Canada we identified an additional type of report of medium-reliability, the Estimate Report. In reality, many valuation reports issued as Calculation Engagements by qualified valuers may have higher standards than required, since the valuer may want to ensure that the value is reliable, making the reports similar to Estimate Reports as understood in other countries. Some estimate reports in Europe also report a value range in some cases. Instead, in legal circumstances involving stock-listed companies, valuation reports for the court may be much more comprehensive than typical Valuation Engagements, sometimes exceeding 200 pages.