The term ‘value’ causes so much confusion amongst those in the financial advisory sector. On the surface, it seems like such a simple term. But, once you dig deeper and require any type of valuation for your business, the complexities arise.
There are a number of different reasons why financial advisors require valuations. Nonetheless, they tend to be related to some desire to retain or attract the next generation of advisors, monitor growth, plan for succession, or improve the business. The valuation should be seen as a starting point for which decisions and negotiations can be made, as opposed to the end game.
Why valuations are so tricky
The problem with valuations, and this is something that never seems to be addressed, is that they are dependent on the inputs used. The process is a variable-dependent one and, therefore, different outcomes easily arise. So, if you alter the terms of a deal to increase contingency payments, then the implication for value is significant. Also, if you fine-tune your compensation plan using stock grants, the impact of doing so needs to be factored into your stock’s price.
The truth is that a lot of the conventional valuation engagements do not address the very factors for which they are being prepared to deal with. Valuations must be dynamic, yet most of them are not today. Instead, valuations measure everything that is known at the time they are put together.
The blueprint for an effective valuation
Instead, for a valuation to be effective, accurate and dynamic, it needs to understand the strengths and weaknesses of every valuation, predict the future and measure performance across all applicable business drivers. With this, you are able to see the impact of value on all areas of the business, and this leads to informed decision-making across a number of areas, including planning, acquiring and hiring.
Still, it goes without saying that the word ‘value’ itself is a confusing one. If you do a quick look online, you will see an abundance of definitions, all differing from one and other, even if ever so slightly. Nevertheless, most seem to agree to the idea of fair value, which is a concept originally expressed by Benjamin Graham, who also advocated intrinsic value.
For those who are unaware, intrinsic value is the value of a company, product, currency or stock, which is determined through fundamental analysis that is absent of its market value. Why is this important? Quite simply, informed buyers care about intrinsic value, so you should too. These clients know that no two firms or clients are alike, meaning that there is not a revenue multiple that exists to give a fair evaluation of value.
To conclude, it is not difficult to see why there is such confusion when it comes to the term ‘value’. The value of something is dependent on the inputs used, and this is where disparities arise. Next time you are assessing the value of something at your business, consider the intrinsic value, and you may find that you get a lot further.