Tips from the Field
| Author | James L. Horvath & Tim Dunham |
| Pages | 719-747 |
719
Chapter 26
Tips from the Field
james l. horvath & tim dunham
In valuing a business or investment by mechanically applying methodolo-
gies, a va luator can easily — and sometimes conveniently — overlook the
practical reality. A comprehensive and well-founded valuation analysis will
appear reasonable both from the perspective of the input-output of valu-
ation methods and equations as well as a common sense viewpoint. The
value conclusion should result from a progression of logical t hought that
makes sense to valuation professionals and non-practitioners alike.
The following sixty tips from the field are a collection of first-person
accounts, third-party observations, and suggestions on the sensible applica-
tion of valuation theory.
A. GENERAL VALUATION PROCESS
The process of completing a valuation assignment can run the gamut from
very ordinar y and fami liar to incredibly intricate and arduous. It is impor-
tant to not get lost in either the detail or the lack thereof.
1) Confirm Existence of the Asset
It is important to “kick the tires” when completing any valuation. In one
case, we were asked for an opinion on the value of a company’s software.
The company had just obtained two va luations. One valued the software at
$140 million, the other v alued it at $40 million. Both valuations depended
on a discounted cash-flow approach. Management b elieved that t he fair
720 james l. horvath & tim dunham
market value of the software was likely $140 million or more and wanted a
third, supporting opinion.
As part of our valuation analysis, we asked for a copy of the software so
that we could verify its functionalit y and richness and estimate its replace-
ment cost using function-point analysis. We learned that the company had
not yet developed the software. The executives of the company said they
planned to use the proceeds from the sale of partial interests in the software
to finance its development.
The previous two va luators apparently had blindly applied a discounted
cash-flow approach to value non-existing software, or at best, an idea.
2) Verify Key Information
We were involved in the valuation and merger of two companies. The pur-
chaser paid $6 million for Target A . The transaction price was incorrectly
reporte d in the fina ncial sect ion of a major newspap er as $24 mill ion. A few
months later, we were asked to review a valuation report prepared by a valu-
ator from another firm on a company competing in the same industry. We
concluded initially that the valuation was unusually hig h. When we looked
at the benchmark comparables, we discovered the valuator had relied heavily
on the $24 million incorrectly reported as having being paid for Target A.
In addition to confirming the actual amount of a comparable transac-
tion, the underlying attributes and substance of the transaction must also be
reviewed. Unusual features and motivations can af fect a transaction price.
In the majority of cases, valuators can obtain or verify transaction details
through discussions with t he seller and buyer and their representatives.
3) Internet Research
The internet is a powerful and easily accessible information source but be
wary of credibility.
4) Site Visits and Management Discussions
Early in my valuations career, I was scheduled to appear as an expert wit-
ness. As the trial began, the judge spoke to the solicitors who had hired me
and suggested that they should settle, in part, because he would place little
weight on the opposing expert’s report. The opposing expert had not visited
the business, conducted a site inspection, or interviewed management.
A simple tour of the business can easily sway a valuator’s views on value.
In some extreme cases, such as: when a business presents badly, appears
like a place waiting for a major accident or catastrophe to happen, or indi-
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