Business valuation is a constantly evolving science, shaped by empirical research, opinions of leading experts and the judgement of the valuer. It is impossible to pinpoint the exact intrinsic value of a company, so all methods are aimed at detecting and quantifying as many factors as possible that can have an influence on the company’s value.
There are many professionals who offer valuations as a service: accountants, auditors, tax consultants, financial advisors, sometimes also lawyers and management consultants. Most corporate investors tend to value their holdings independently, except when an external valuer is needed for regulatory purposes (e.g. consolidated financial statements).
The quantity of valuation knowledge out there is overwhelming, so it is hard for consultants to know and to be able to apply all methods and theories, unless they have made valuation their primary focus. So if you need to have a critical valuation done or need support for price negotiations, specifically look for a valuation expert.
It is normal for many consultants to simplify methods and valuation rules, which is understandable considering that some theories tend to overcomplicate the basic valuation principles and are hard to grasp in a realistic setting: it should be down to the individual valuer to decide which of the experts’ theories available should be applied or not. But only as long as one knows why. The important thing with any valuation result is to be able to explain all decisions taken during the valuation process, to understand the nature of the business and to consider the scope of the valuation. Most valuations fail to address these points.
It is no surprise that most business owners do not know where to set the bar when choosing someone to value their business. Missing details, generalisations and technical data displayed without proper analysis are just a hint of a low quality valuation: the receiver should be able to grasp the valuation process from the final report. Valuations can be complicated, but all data and methods can be explained and justified. Of course this applies to a complete valuation engagement: information costs money, so when the owner opts for an indicative or short valuation report for a non-critical assignment, some information will be omitted – nonetheless it should be comprehensible.
Most national and international valuation standards are still quite basic, and rightly so, since valuation theories are in continuous development and a high degree of judgement is required in valuation. For this reason, the vast majority of countries do not require a special licence for performing business valuations on top of the local consultant’s licence. The only countries I’ve come across so far that issue a special valuation licence are Bulgaria and Montenegro, probably with the aim of introducing business valuation as a profession through a qualification process.
Real estate appraisers, on the contrary, are usually subject to restrictions for performing a complete real estate valuations, for which a country-specific qualification is generally required. For more information on some of the individual countries’ organisations see TEGoVA , the pan-European association for the development of real estate valuation standards.
The International Valuation Standards Council is the organisation in charge of bringing together global valuation organisation and develop common standards: this is by no means the complete list of authoritative bodies that issue business valuation standards. While the International Valuation Standards still remain quite general, many national associations are increasingly cooperating and sharing knowledge with the aim of harmonising and strengthening their national business valuation standards. Some organisations that release internationally recognised qualifications require members to comply with their set of standards, which is a good strategy for improving the quality of valuations.
Featured image: Stigis – Reykjavik