Can a low or high valuation be ordered from a valuer?
It is five years since we won our very first piece of valuation work and since then our business has grown and grown. A big thank you to all our customers and their legal advisers!
There are two phrases which remain common to the valuations world, which I very much hope we can start to dispel.
The first one is that a “low” or even a “high” valuation can be ordered from a valuer. We understand why this might be the desired outcome, but a valuation can only be low or high if the evidence and analysis says so. That being said, whether we like it or not, the vast majority of small companies (and indeed small shareholdings) do not have much intrinsic value when measured against the gold standard of valuation metrics – the requirement in UK law that the valuation is prepared on a willing buyer, willing seller, open market, arms’ length basis. If you have a client who is concerned about what the valuation might be, I encourage you to ask the valuer how they think about this issue and what evidence and arguments can be used to form a defensible valuation. A poorly generated low (or even high) valuation could easily come back to bite the customer at a later date and cost far more than the price of a report from an expert.
Of course there are unusual situations where the valuation can be deceptive. My personal favourite is where there is a controlling shareholding sitting inside a trust without economic rights. On first glance the value may be very low because of the lack of rights to dividends and a return on capital. However this is unlikely to be the case as control comes with intrinsic value. Furthermore, the trustees will have an obligation to ensure that be best interests of beneficiaries are achieved in a sale of a controlling shareholding, so a buyer of that holding would have to pay commensurately.
The second and my real favourite phrase is that valuation is just an art or a science. This is a phrase that does not actually make sense. If valuation was merely an art, surely any one with a creative bent could bung together some numbers and words and produce an answer that everyone would accept? That is clearly not the case. Equally, if one only applies science and mechanical logic to a valuation you would miss all sorts of critical factors which help to frame a valuation that is actually defensible. For example, in the very simple scenario of a NAV valuation, if you exclude the intangible value that is the company’s brand, are you or are you not missing some value that should be included OR is it safe to assume that that intrinsic value is captured in the profitability of the company and therefore included in the NAV calculation? Who’s to say? But maths alone won’t give you the answer.
Ultimately, whilst all valuations must hang off numbers and come to a number, determining that number is about using the evidence to build an argument that is defensible. When we are working on valuations we frequently think about lawyers also crafting arguments in a similar way to reach the conclusion that, at worst, no one can disagree with and, at best, leads to the comment, “Brilliant. I can absolutely see why this answer is the correct one.”
If you find yourself with a valuation on your desk that needs an expert to use the evidence to create a defensible number, and enable you and your client to finish the project in hand, why not give us a call. We would be delighted to assist.
