Disclaimer – Opinions expressed are solely my own and do not express the views or opinions of my employer.
If after reviewing your valuation and all you have is a collection of numbers in a spreadsheet, you do not have a valuation at all. At that point you simply have a model’s output calculations of various inputs. It has been said that a good valuation is a bridge between numbers and stories, and I could not agree more. We have a tendency to see numbers on page as being unbiased when in fact we should be questioning these very figures and biases. In addition, those figures need to have a story behind each and every one. Does the appraiser’s story of your business match the answers on the page?
According to a recent talk by NYU professor Dr. Damodaran, there are 5 steps to value a business:
1. Tell a story about the Company
2. Does the story you told make sense?
3. What has been put in place to make the story happen?
4. Take each part of your story and convert these to a number
5. Have a feedback loop open to revisit each.
To tell a story, an appraiser should survey the landscape. This includes getting an understanding of what the business does, its products, management team and history, the competitors, why people work at the business, why customers buy from them as opposed to another company, and the macro environment. More importantly, an appraiser must create a narrative for the future that is consistent with management’s strategic plans and is possible, plausible, and probable. The end user should be able to check the narrative in the valuation against history and to determine if it makes economic sense.
Is it possible for the Company to achieve the forecast? Is it plausible or is it a fairy tale? Has anyone else done this? Is it probable or not? The narrative should be connected to the key value drivers of the business. For example if I am telling the story in my discounted cash flow method of a high revenue growth high profitability company but I have very little reinvestment in the form of capital expenditures does that make sense? Am I biasing the answers high or is there legitimate rationale for the Company having low CapEx requirements. Perhaps they are a SaaS model which permits for low investments in hard assets and in which would make for a legitimate story.
I end with how I began. Does your valuation report tell a story?
I would be happy to review for gratis any valuation reports you’ve had performed and give you my feedback. Please contact me and let’s discuss if your reports are telling the right story of your business or if they are simply an analyst taking management’s forecast, throwing them into a model, and spitting out an answer.