What are the best practices for ensuring your valuation model is free from bias or conflicts of interest?

1 Define your purpose and scope

The first step to avoid bias or conflicts of interest in your valuation model is to clearly define your purpose and scope. Why are you valuing the entity or asset? Who are the intended users or beneficiaries of your valuation? What are the assumptions, methods, and data sources that you will use? How will you communicate and present your valuation results? By answering these questions, you can establish a transparent and consistent framework for your valuation model, and avoid any potential misunderstandings, misrepresentations, or manipulations.

2 Choose appropriate valuation methods and models

The second step to avoid bias or conflicts of interest in your valuation model is to choose appropriate valuation methods and models. There are various valuation methods and models available, such as discounted cash flow, market multiples, asset-based, or option pricing. Each method or model has its own strengths, weaknesses, limitations, and assumptions. You should select the method or model that best suits your purpose and scope, and the characteristics and performance of the entity or asset that you are valuing. You should also consider using multiple methods or models to cross-check and validate your valuation results, and explain any significant differences or discrepancies.

3 Use reliable and relevant data and information

The third step to avoid bias or conflicts of interest in your valuation model is to use reliable and relevant data and information. Data and information are the inputs that drive your valuation model, and they can have a significant impact on your valuation results. You should use data and information that are accurate, timely, consistent, and verifiable. You should also use data and information that are relevant to your purpose and scope, and the entity or asset that you are valuing. You should avoid using data and information that are outdated, incomplete, inconsistent, or biased. You should also disclose the sources and quality of your data and information, and any adjustments or adjustments that you have made.

4 Apply sound judgment and critical thinking

The fourth step to avoid bias or conflicts of interest in your valuation model is to apply sound judgment and critical thinking. Judgment and critical thinking are the skills that enable you to interpret, analyze, and evaluate your data and information, and to make reasonable and logical assumptions, estimates, and projections. You should apply judgment and critical thinking throughout your valuation process, and challenge your own assumptions, estimates, and projections. You should also consider the sensitivity and uncertainty of your valuation results, and perform scenario analysis and risk assessment. You should avoid making arbitrary or unrealistic assumptions, estimates, or projections, or relying on rules of thumb or heuristics.

5 Seek independent review and feedback

The fifth step to avoid bias or conflicts of interest in your valuation model is to seek independent review and feedback. Independent review and feedback are the processes that allow you to obtain a second opinion, a different perspective, or a constructive critique of your valuation model, from someone who is not involved in or affected by your valuation project. You should seek independent review and feedback from a qualified and experienced valuation expert, who can review your valuation model, methods, data, assumptions, estimates, projections, and results, and provide you with objective and unbiased feedback. You should also be open and responsive to the feedback, and make any necessary changes or improvements to your valuation model.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?