Valuations: art or science?

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Johann de Lange | CA(SA) | Member | South African Institute of Chartered Accountants (SAICA)Co-founder | Worth.Business | Director | Pollination Capital | mail me |


Is value determined by skilled negotiators or is it an accurate and well-founded calculation performed by a skilled valuator?

Schools of thought

There are two schools of thought on the determination of the value of an asset: Value is a function of negotiation in the marketplace versus the outcome of sophisticated calculations based on facts and statistics. This article explores the pitfalls of both and advocates a combined approach for the most credible outcome.

On the one end of the spectrum there are arguments that the relative skills and negotiation leverage off the different parties in a transaction to determine the final value outcome. Business salespeople believe that they don’t need a valuation because they know what price they will accept. Similarly, often buyers simply decide they will not pay more than a certain amount as they can do better doing another deal. Supply and demand rules the roost! True, but how do these parties decide on what their negotiation ranges are? How does one party justify them to the other party?

The opposite argument regards the value of an asset as the outcome of accurate calculations supported by facts, statistics and sound assumptions relevant to the circumstances of the asset in question. This argument disregards the subjectivity of the valuator in question and the underlying assumptions are accepted as facts with no room for flexibility. This rigid approach more often results in an unrealistic value. One slightly miscued assumption can have a major effect on the ultimate outcome.

Reason for valuation

What about valuations for regulatory purposes, where there are not necessarily negotiators involved? How about extreme circumstances such as a fire-sale or where a highly sought-after technological asset is acquired? What if there are substantial synergetic benefits sought by the acquirer? What about sentiments – may it be market sentiments or sentiments attached to the business by founders? There may not be precedence to formulate assumptions accurately and therefore the base of the valuation may not be sound. There may also not be comparable values in the market and therefore nothing to guide a valuator to what ultimately is a reasonable value. Likewise, anomalies complicate the calculations and add to the subjectivity of the underlying assumptions.

Clearly both arguments have their merits but also their drawbacks. The rigid use of the one or the other often produces a result that is not credible. How is the gap bridged between the two approaches, is there any middle ground? I don’t think the solution is a compromise but rather a process where the best of both approaches are combined.

Foundation of valuation

One needs to understand the


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Read the full article by Johann de Lange CA(SA), Member  South African Institute of Chartered Accountants (SAICA), Co-founder Worth.Business, Director Pollination Capitalas well as a host of other topical management articles written by professionals, consultants and academics in the April/May 2020 edition of BusinessBrief.


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