External consultants are questioning your valuation methodology. How will you defend your approach?

We do many valuations for lenders looking to make a new loan on assets or seeking REO value if they determine they need to take back an asset. Our value is compared to other advisors, their own underwriting and their borrowers position. When there are significant differences, it typically comes from different assumptions of future prospects. Talk through that and be open minded. If somebody is dug-in on their assumptions, it could be from different motives. If it is a lender that needs a deal to close to make their goals, they have an incentive to be aggressive. If it is a lender looking to minimize impairment of capital, they have an incentive.... if you know the incentive structure, you can better understand the differences.

The Private Equity valuation methodology is based on the integration of several key approaches: discounted cash flow (DCF), comparable company analysis, and transactions. DCF takes into account the specific risks and potential of a company, relying on detailed forecasts of profitability and costs. The comparable company method allows you to adjust the valuation taking into account market trends and multiples relevant to a given industry. Transaction analysis helps take into account recent transactions in similar market segments. This comprehensive approach ensures a more accurate and reasonable valuation, minimizing the influence of subjective factors and market volatility.

To defend your valuation methodology when questioned by external consultants, provide a clear rationale. Explain the assumptions and data sources underpinning your valuation. Highlight the industry standards and best practices you followed. Present a detailed analysis of comparable transactions and market conditions that support your approach. Be transparent about the methodologies used, such as DCF or multiples, and why they are appropriate for this context. Address any potential weaknesses in your methodology proactively and discuss how you mitigated them. By offering a well-reasoned and transparent explanation, you can effectively defend your valuation approach.

I see questions as an opportunity to build consensus and strengthen guidance. Starting with a socratic method, looking for key pillars in what is the desired outcome and formulating a balance. It is important to understand the root cause and validity of the questions. The bottom line is to find the bespoke solution the client needs.

The important rationale this will birth into life is that. Client would have properly articulate their business risks (present and into the future) considering industry experience, govt behavior and many other factors, incorporate specific plans of the company and select appropriate cost of capital/discount rate. From an audit perspective, this would given confidence and assurance that the forecasted cash flows have genuine business basis.

May be a bit leverage for the way of communication is missing. Usually the methodology of a consultant is demonstrated in the proposal rather than in the final reporting offered to Other consultants. Accordingly, maybe the methodology need to be communicated first and no harm to walkthrough the Pilars, so it’s crystal clear for others and will enhance the reading of your report.