The hard work in valuation

aravin damo
Jul 10, 2017 · 7 min read

When I get introduced myself among the financial professionals as a professional business valuer there I was see “awe” often. There is good truth behind this awe — many in finance world love seeing them as business valuer but they don’t purse it as a career for the same reason that one aspires to become an actor but only a few make it and for the same reason that one aspires to have his own business, be an entrepreneur, a successful entrepreneur, but only a few make it.

The financial career ladder has valuation top of its paying scale and the reason behind is something I didn’t know when I was young and chose this career path. When I first heard this saying that financial success you need to be at the right time, at right place and with right people and strongly believed it the best insult that can happen to hard working people. Like every other kid I was told to work hard and after working hard, then again go and work hard. It was exactly what my father did and does to bring home Goddess Lakshmi and I followed his footsteps. I pursued my passion on business valuation as a career, worked hard and without knowing that it was putting me with right people at right time and at right place. With time my belief on hard work was intact but started realizing the importance of the three “right”.

When you decide to become a business valuer and then you start to realize that you are dealing with people who have a wealth in terms of a business (right people for financial success), you are dealing at the time of a potential sale (right time for financial success) and the people come to you and you need not go to them like how we go to the doctor (right place for financial success). This is why business valuer stays on the top of pay scale of a financial profession.

Despite “right people, place and time” being a default advantage for financial success of a business valuer, a sustained hard work only help on staying on top of the game. Hard work is very subjective to profession and for sure it is not only physical toiling. Doctor hard work is is to understand the pain of poor medical treatment, Engineer hard work is to understand the pain of poor construction, Farmer hard work is to understand the pain of crops and cattle, Mechanic hard work is to understand the pain for improper fixing, Valuer hard work is to understand the pain of giving an unjust valuation.

Every good business valuer works hard on these five things every time he take on the engagement.

  1. Personality of the valuer
  2. Personality of the valuer
  3. Purpose of the valuation
  4. Base of the valuation
  5. Premise of the valuation

Let’s take case of our client who use to a two-year old Radio Station, bleeding money yet to see returns. “Might is Right” thats just not how the Indian road traffic operates, so is how the broadcasting industry. Being part of a media group drastically increases survival of a radio station. Radio revenues is only from selling on-air advertisement slots of 30 seconds. Sometimes it is 20 seconds. Price per slot vary according to the peak timings and agency relationship. Our client generally a shrewd entrepreneur, mishit with this radio venture where the media group that was suppose to partner him backed off for certain political pressure and he had to ride the horse alone for the next years. After a couple of years he sent signals of selling ,a few responded and one buyer showed serious interest. That buyer wanted to know the valuation of the radio station and let me take you through the hard work of the Valuer to get the right valuation.

Perspective : Right perspective, Right valuation

Despite anything, the seller of the radio station wants maximum value and the media house thats buying wants it at lowest price. This is where the perspectives start to matter in business valuation. What that looks fair for the seller may not be fair for the buyer. As a business valuer, we need to find one single price that fair to both. Firstly, we need to see what will be fair price for seller and then what will be fair price for the buyer — as everything in this world is sold and not bought. Even though the radio station is the same, the perspective in which each of them see are different because their perspective of the business as an asset is different. We need to digest their perspectives and gain strong insight on how things are and a guess on how things will turn out to be.

Apart from how both of them see the radio station we also need to understand the perspective of how the market sees it.

Gathering all the perspective will help us know the price range for the radio station and most often the range is wide and zeroing out on a single value is hard. Seller of the radio station says 150 million rupees and the buyer says 80 million rupees and market indicates 10 million rupees. Here’s when detailed investigation of background information plays it part on the multiple perspective and settle on a one thats better than the others.

Personality: Preparing for that perfect personality

Ability to speak a lot, come up with quick wit and cheerful that makes a Radio Jokey. She works hard on these three things everyday. Objective, unbiased and technically competent are the top three personality traits for a business valuer. We work hard on improving this everyday and fight a mental battle of being fair, equitable and just.

Objective: Making impartial judgments as to the reliability of information, inputs, insights and assumptions. Ability to get over the situations that may impair objectivity. Its about the focus of extracting the fact out of fantasy, fiction and future expectations.

Unbiased: Unbiased is the plant. Integrity is the seed. Integrity is being straightforward and honest in all business relationships. Integrity also implies fair dealing and truthfulness.

Technically competent: Maintain professional knowledge and skill at the level required to ensure most unbiased and objective valuation and continually upgrade to the ever evolving methods and approaches of business valuation.

Purpose: Asking the WHY?

Consolidation in Media industry in India is rare as the Broadcasting industry expands with more radio stations and occupying almost all the digits on FM frequency range. So, is with the the growing channels on the DTH and Cable TV. However, in this case was a sell-buy transaction and the purpose is an consolidation effort for the buyer. This is when I feel that TED Talk sensation and turned author Simon Sinek’s Golden circle of Why, How and What, hold true at business valuation. Defining the purpose (“asking why?”) clears a quarter of the shady perspective cloud and now we are clear with every money transacted with this consolation attempt. With more clarity on the backdrop we can understand who gains what. This helps to move on to “how to” of valuation and the “what to” with much better comfort and objectivity.

Base: Multiple names for Multiple reasons

Some may call it Market value, another calls it Fair value, and another Equitable value. Then some more names as Investment value, Synergetic value and Liquidation value. These are all the same names to business worth used depending on the purpose of valuing it. A good business valuer will accept that there is no single secret recipe and it changes according to the business situation.

Our radio station was bleeding and all good efforts of the owner was not enough turn it profitable. Finally, he decided to put it for sale and ready to sell in piece-meals basis (Frequency license, Studio assets, Property and so on as separate basis) if that will earn him the maximum money. This means he was ready for an “liquidation value” of selling the business assets as-is where-is basis.

While the buyer was for buying it as an ongoing entire business and was ready to buy at “equitable value”. However, that there was synergy benefit from the takeover it was wise to look into the “synergic value” too.

Premise: Mandatory arguments for right valuation

Hard part of business valuation to move from a highly subjective zone to an objective spot. Radio station though its bleeding it had a worth of 150 million rupees as per the seller, 80 million by the buyer and around 100 million by the market from sale of a another similar radio station. Everything here is subjective — how much more advertisements can take place, can the rate per slot increase, how much of common cost saving will happens and so on. Most often we resort to these four arguments to chase away the subjectivity as much as possible.

  1. Is the radio station in position for “highest and best use” ?
  2. Is the “current use” of the radio station is less than its “best use”?
  3. Is the radio station in mindset for a “liquidation” sale?
  4. Is there “forced sale” rather than a normal sale?

After diagnosing the nature of valuation through these arguments as an business valuer we can be more confident of reaching an objective answer on the business worth.

Cheat sheet for gaining the right perspective in a buy-sell transaction

Best method to gain a hold on a buy-sell transaction is to live through the emotions of both the seller and buyer.

Seller’s mind voice:

Will I sell for that money?

Will I be better after the sale?

Buyer’s mind voice:

Will I pay that money?

Will I be better after the purchase?

Deep and repeated reflection on these questions bring out the required perspectives that play in a business valuation.

    aravin damo

    Written by

    Co-Founder, EdisonPlan

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