Choosing your methods: International Valuation Standards weigh in
If you do business valuations internationally, it is a good idea to find out what the International Valuation Standards (IVS) have to say about the choice of methods. The standards are accepted for business valuation across the globe these days. In some countries the IVS is the de-factor national standard for asset valuations.
One key section the IVS covers is how to choose your business valuation methods. Recall that business appraisals are done using three approaches: Asset, Income, and Market. Under each approach you have the choice of several valuation methods.
International Valuation Standards encourage using several valuation methods
So how do you pick the methods for your business valuation? The IVS encourages the valuers, as the standard refers to business appraisers, to consider a number of methods under each approach. The idea is to choose the tools that work best in your particular situation. The selection criteria are:
- The standard and premise of value you use in your analysis. For example, the fair market value standard and going concern premise are common in operating company valuations.
- The strengths and weaknesses of each method. Again, this should be specific to your project. An example is choosing the market-based valuation methods only if plenty of reliable, recent, and readily observable business sales data is available.
- How appropriate the methods are. To judge this, ask yourself if market participants in your industry prefer to use specific methods for valuation.
- Access to information you need to run a given valuation method. For instance, do you have reliable earnings forecasts and cost of capital data to create a discounted cash flow valuation?
International Valuation Standards allow the choice of just one valuation method
Unlike the USPAP standard, under the IVS you can choose just one method to do your valuation if you believe it gives you the confidence in getting an accurate result. However, before picking your method, your should consider a number of others and make an informed decision.
When in doubt pick several methods to cross check your results
The more challenging your project, the more you are encouraged to resort to several valuation methods to cover your bases. When you get widely divergent results, simple averaging does not cut it. Instead, you should delve into the differences and help your valuation report reader understand why these differences exist and what they mean.
Public capital markets for best quality data
The public capital markets remain your best bet for reliable, observable, and credible valuation data. This applies to your valuation multiples and discount and capitalization rates. Steer clear of stale, questionable, or downright misleading data often peddled by private data brokers out to make a buck.
Much like the AICPA’s SSVS No 1 standard, the IVS let you choose the methods together with the client. Again, as is the case with the calculation engagement under the SSVS No 1, you should spell out any limitations that may affect your results.