Before starting with your valuation you should establish a good information base, whether you’re doing it for your company internally or for an external client, which will save you time and prevent mistakes. This means going through a checklist on the assignment’s characteristics and collecting all key information.
If you’re carrying out a valuation as an external consultant you will also have to be familiar with the legal framework of the valuation and include the necessary disclaimers in the contract and report, as well as requesting a letter of representation signed by the management to confirm the truthfulness and completeness of the information given before delivering the final valuation report.
However, this doesn’t save you from doing your best to extract all useful information for the valuation. This is one of the most challenging aspects of valuations, since many companies are unwilling to give out too much information. Also, a strong focus is placed on past information, while valuations are forward-looking, so details on the future strategy are essential. For a valuation, all information is potentially useful and can have an impact on value. This is something that the client needs to know from the start, just as he/she needs to know that any new version of the financial plan delivered or late delivery of information means more hours and additional charges. So it is important to establish a good communication with the client so that both parties are clear about the extent of work and to allow the collection of information to take place quickly and smoothly.
The valuer should go through a checklist, verbally or in writing, before accepting the project:
- First by establishing the scope and audience of the valuation as well as the intended use of the report: this will directly influence the type of valuation to carry out. The reasons behind the potential investment, if this applies, as well as the planned holding period will also affect the valuation and the additional consulting work that is appropriate to offer;
- Also collect the company registry number, holding(s) or company part(s) to value, so that there is no confusion on the valuation object. It is a good idea to research the financial health of the company before starting, because it is natural for clients to hide any negative features before the mandate is accepted;
- You should inquire about potential legal issues, originating for example from an exchange listed company, contractually set valuation methods, foreign holdings and any potential conflict that can originate from the valuation;
- The company size, stage, valuation date and report delivery date will help you plan the work ahead. The presence of a financial plan and an investment plan will impact the hours needed to complete the work, your need to hire external experts or pay for specific resources, and therefore your fees for the mandate. In either case, it will have to be clear to the client that the valuer will question all information included in the financial plan;
- Collecting short information on the future strategy and of how sure the company is of its strategic direction helps you ask the right questions during the assignment.
The contract or offer letter to be signed by the client should incorporate all of these key assumptions: the type of valuation and report (omitting too detailed valuation methods, that might change during the valuation); whether the valuer acts in a neutral or consulting role, and possibly additional services offered on a consulting basis (e.g. price negotiation); an explicit list of all services included and all services excluded from the set contract fees; timing, information on the additional hours and therefore costs of updating information or postponing the assignment due to the late delivery of information (that ideally has to be directly communicated with the client); liability, information disclosure of both parties as well as the limitations on the use of the report.
After this, you can submit an information request list adapted to the specific company and assignment. It would normally include:
- Articles of association, public company records
- Past financial statements for at least 3-5 years, possibly also quarterly for the past 2-3 years
- Company presentations to establish the nature of the business and products
- Internal studies on the market and competition
- Protocols or memos of internal meetings, in addition to carrying out an interview on the company’s strategy
- The current budget and financial plan, including separate plans of new projects/products or departments, the investment plan and the pricing/volume sales assumptions
- Past budgets and financial plans to assess the reliability of the current ones
- Internal management accounts or a general account ledger to analyse financial accounts information in more detail
- Ageing schedule
- List of assets and depreciation schedule
- Description of financial holdings and related contracts
- Main suppliers and client contracts, possibly sales value to largest clients (also anonymously)
- Credit contracts and information on potential refinancing conditions
- Leasing contracts
- Tax returns, tax audits or information on tax situation
- Details on provisions and financial interest, as well as pensions plans
- Existing legal proceedings or legal threats
- Group and company organisation charts
- List of employees and relative salaries
- Internal group services and transactions
- Past valuations
- Information on spare production capacity
Some of these points might require an explanation, sample list and the reason for needing the information. Most importantly, make sure that the client confirms for every unfulfilled point in the request list whether the document does not exist or whether it will not be disclosed. Also analyse whether it is feasible that a piece of information is missing or if it’s more probable that you haven’t been put in contact with the person who has access to all key information.
Featured image: “The Crash (Falling dynamic)”, 2015, Jochen Höller (Mario Mauroner Contemporary Art, Vienna)