You're navigating valuation discrepancies in a deal. How do you ensure integrity remains intact?

From a general investment principles basis, longevity of business and its competitiveness is in my view one of the most important aspect. Keeping a reasonable terminal period and value when looking at future cashflows is expected to give more realistic view. At the end all valuation models are models with assumptions. Understanding and building range of possible variations in assumptions is very important to build reliable estimates.

Understanding the "why" when looking at valuation methods will improve your determination of the correct use of which to use (and when). FOr example, whilst you can technically use the DCF method to value most companies, understanding "why" the DCF will is relevant in this case will determine whether you actually should be using that method for this particular company. Oftentimes, a mixture of several valuation methods may be necessary to hone in on a more precise and considered valuation range.

Understand that there is no such thing as "fair value". The buyer is limited by the economics of his business model and the seller is limited by opportunity cost (real and/or perceived). Both parties are also impacted by their risk assumptions and risk appetites. All you can try to arrive at is a valuation acceptable to both parties. Sometimes you find a valuation that works, at others not. No party is necessarily wrong. If there is misalignment all you can hope to do is discuss the different assumptions and alter the deal structure to try and mitigate a misalignment of key assumptions which normally revolve around risk where one party perceives more risk than the other.

The existence of valuation discrepancies is absolute. For instance, the DCF method can be affected by the buyer's financing costs, making persuasion ineffective in such cases. Acknowledging the differences while understanding their reasons is the key to solving the problem, rather than merely pursuing a "consistent valuation" or trying to persuade one side. For example, I once encountered a buyer who provided a lower valuation because his financing costs were higher. So, is it possible to help the client leverage to lower his financing costs? Can we structure the product so that he acquires the subordinated tranche?

Being able to identify the key valuation drivers of your model is important. Whilst you will inevitably have many levers and inputs that drive your final calculations, identifying the most important inputs save you time by focusing on the key drivers and allow you to analyse how these have been formed in detail. Which drivers play the largest role in affecting valuation? These drivers are the ones that need to be compared and the assumptions dissected.

Attorneys are key in maintaining integrity when resolving valuation discrepancies in a deal. They provide an objective perspective, ensuring disputes are based on solid legal and financial grounds. Attorneys gather and analyze data, such as industry benchmarks and historical performance, to support a fair valuation. They also ensure contracts clearly reflect the agreed-upon terms, protecting against future disputes. Additionally, they identify and mitigate legal risks that could impact valuation. By ensuring transparency and data-driven reasoning, attorneys help achieve a fair and defensible deal outcome.

Footnotes, comments and explanations are key! Documenting your process will not only show your detailed thought process and judgment, but make things easier and quicker for yourself and anyone viewing your methodology at a later date. When in doubt, add a comment.

Your integrity will always be accountable, especially when nobody is looking. Remain true to yourself, but also your peers, funds, and company values, in all circumstances.

Integrity is non-negotiable. Its the seal you bring to the table. Will last forever and will give you the credentials again and again that will allow you to be trusted by all parties.