Valuing a business is part art and part science

 

Stephen O'Flaherty, Partner, Deal Advisory, featured in The Irish Times on business valuation, explains that the subjectivity involved in valuing a company often leads to varying results among different valuers, driven by factors such as risk attitudes and the importance placed on intangible elements. Read his commentary below.

Rarely will two valuers arrive at the same value for a business,” says Stephen O’Flaherty, corporate finance partner with BDO. This subjectivity can have its roots in various reasons, from attitudes to risk to the weighting given to intangible factors.

“At the most basic level, future earnings are the dominant metric used by most buyers when assessing the worth or value of a business,” says O’Flaherty. “After all, when buying a business you are buying its future cash flows not its past cash flows.”

Predicting the future is impossible, but valuation professionals use established techniques to reduce uncertainty.
 

We will review the future prospects of the business; this can include, for example, assessing the sector outlook and reviewing the customer base to see if there is over-concentration on any one customer or region.

Valuation techniques include “not only looking at past market transactions but also looking at required equity returns and debt costs to ensure the valuation arrived at is robust and reflective of latest data. As valuers we have access to global databases of performance and transaction data as well as market premia.”

O’Flaherty advises keeping a keen eye out for variations between projected financial performance and up-to-date management accounts as due diligence progresses. “Sometimes sellers can be over-ambitious when setting out their projections, this is understandable as they are trying to paint the best picture possible for their business.”

“Obviously, the culture and people involved in the business are a key consideration for a buyer. In terms of valuation, if, for example, there is perceived reliance on one person within the business, then projections may be modified for valuation purposes through scenario analysis and or the application of a company-specific risk premium,” says O’Flaherty.