The valuation of companies and shares in the UK is largely unregulated. With everyone from company sale brokers to the man down the pub offering valuation opinions how does a business owner or adviser make sure they choose the right expert valuer?
A valuation may be required for a wide range of reasons, but the most common instances are:
- In an M&A transaction to determine an offer price for an acquisition or assess offers received from bidders during a sale.
- Company purchase of own shares.
- To resolve a shareholder dispute.
- Divorce settlements.
- Tax purposes, including share option schemes.
- Financial reporting.
A good valuation adviser should be able to combine a breadth of experience in the above areas together with in-depth and up to date technical knowledge. We have set out below five key questions to ask any prospective valuer before you appoint them:
1. Do you specialise in valuations?
Many generalist accountants undertake valuations but these are mostly for tax purposes where a pre-defined desired outcome is already known. Very few accountants regularly undertake formal valuation assignments for M&A transactions, dispute resolution and litigation, or financial reporting purposes, which often require different valuation methods and techniques from tax assignments.
It can be appealing to get a valuation from a company broker because they often provide these free or at a heavily discounted price as an inducement for business owners to use their sale services. In our experience such valuations are often very superficial or rely on inappropriate valuation methods, may just reflect what the owner wants to hear the business is worth, and many would be unlikely to stand scrutiny in Court or with the tax authorities.
Ideally your valuer should have a track record of carrying out both tax and non-tax valuations across a range of sectors. If the valuation matter may end up in Court you should ensure the valuer is conversant with the Civil Procedure Rules and has experience in preparing reports for the Court.
2. Do you have actual transaction as well as valuation experience?
Valuation exercises and reports can sometimes seem academic and divorced from the realities of business life. Valuers who are also M&A practitioners bring a practical understanding of how deals are structured and priced in the real world. Such experts are worth consulting because they bring a wider perspective to the valuation assignment and can draw on their own experience of business sales and purchases, which can be especially useful in valuation disputes.
3. What information resources do you use?
Non-specialists rarely invest in the information resources necessary to undertake valuations, often relying on nothing more than a copy of the Financial Times and a generic valuation index report.
A good valuer should have access to both a company search database (such as FAME or OneSource) and a transaction database (such as Market IQ or Zephyr) to undertake detailed research.
4. Which valuation methodologies do you use?
If the answer is they look up the PE ratios in the Financial Times or “it’s always 4x to 5x EBITDA” then you are probably talking to the wrong person. Expert valuers will use a range of valuation techniques depending on the reason and basis for the valuation. Your valuer should be familiar with the three main categories of valuation approach and their methodologies:
- Cost approach, that is replacement cost and reproduction cost
- Market approach, such as comparable market transactions and listed company comparators
- Income approach, including discounted cash flow, relief from royalty, the excess earnings method, and option pricing.
5. Do you have any accreditation?
As mentioned above, there is virtually no regulation of the valuation profession in the UK. Therefore, it is always best to seek out the services of a valuer who has voluntarily joined a specialist professional or supervisory body, such as those that hold the Corporate Finance Qualification of the Institute of Chartered Accountants in England & Wales and who are members of the Institute’s Valuations Group. In addition, there are a select number of valuation professionals who are on the Panel of Experts of the President of the Institute and such individuals have a particular depth of experience and knowledge.
To discuss any matters relating to valuations please contact:
Simon Chapman
E: simon.chapman@burgisbullock.com
T: 07831 255302