The 3 Biggest Valuation Myths
Why we think technology will help the Valuation but not replace the Valuer
In our many years of valuing all sorts of things, and keeping abreast of the latest in valuation techniques and technology, we have pulled together 3 Biggest Valuation myths.
In Lady Windemere’s Fan, Oscar Wilde had Lord Darlington quip that a cynic was ‘a man who knows the price of everything and the value of nothing.‘
Let's go ...
Myth 1: Valuation will soon be replaced by Machines
Of late, we have been hearing the buzz that another start-up has come up with a software which can instantly value any asset. You only have to punch the information about your asset (e.g. your Company) in the software and immediately know that the value of your Company is worth $10.87030m.
Wait a minute. Really ?
While this software idea may seem incredibly efficient, is it effective ?
Would you rely on a complete black-box to value your company, or would any buyer accept the price churned out by a valuation software ?
In many ways, the science of valuation is incredibly complex and when you add in human judgement, you probably wouldn't want to rely on a machine (for now) to value any large asset.
A good and experienced human valuer (yes I am making the distinction) offers something that no software can give for now: The value of human judgement and advice, formed from years of experience in different business situations.
So do spend the time instead shopping for a good valuer and less time on buying a black-box software for now.
Myth 2: Valuation is all about complex calculations and Excel Spreadsheets
There was an interesting project which we did in Manila in 2H, 2016 for a major F&B conglomerate. It involved valuing a take-over target and we were asked to review the financial model.
The financial model was built by somebody very technical and capable, and it ran into thousands of lines, and at least 50 tabs in Excel. There were inputs required for maybe a hundred assumptions.
But there was a problem. The woods had been lost for the trees.
The valuation model did not actually reflect a fundamental way in which the Business was ran. As a result, the spreadsheet was pretty much invalidated.
At Future, we follow the philosophy of Occam's Razor where "Among competing hypotheses, the one with the fewest assumptions should be selected". We keep things as simple as possible, but fundamentally correct.
Therefore it is more worthwhile to spend more time understanding the Business first, then plunge into the comfort of spreadsheets.
Myth 3: A formal valuation is just formality for an informal agreement between the buyer and seller
How many times have we heard that the selling price of an asset was arrived at by a hand-shake, and the independent valuation report was left in the drawer to collect dust.
The above scenario may seem fine until something blows up and the best of friends suddenly draw pointed swords.
When we value an asset independently, we actually protect the rights of other shareholders which may not be party to the that handshake.
And the independent valuation ensures a neutral starting point for discussions between the buyer and seller.
There are many cases where formal valuations will be required e.g. in a legal dispute or in a sale where minority shareholders rights are affected.
Would you really want to rely on the good faith of a handshake ?