What do you do if you're asked about your expertise in valuation techniques in Private Equity?

Understanding the context and purpose of valuation is paramount. Valuing a transaction for synergy purposes contrasts significantly with conducting a financial reporting valuation (ASC 820) or assessing a liquidation scenario. Not only do different valuation methods come into play, but also various rights and preferences must be carefully considered, alongside discounts and premiums (such as DLOMs/DLOCs). Even in a controlling stake position, Preferred Equity entails liquidation rights, participation rights, conversion rights, and anti-dilution rights, all of which necessitate quantification in a financial reporting valuation. However, these factors might not carry substantial weight if an exit-based transaction is under consideration.

Fixed Assets are often overlooked from a valuation perspective in the PE space (middle and lower middle market especially): Buyers are sometimes unaware of the inherent tax and other benefits of valuing their fixed assets after an acquisition, and sellers are also not paying as much attention to certain deal structures that could create additional tax bills.

Challenges faced in the PE space are often due to lack of complete or reliable seller data. For valuations, this can sometimes become a tug of war between the buyer and their auditor (decide how robust the scope of a valuation needs to be in order to satisfy audit requirements, while addressing the need for external advisors to create or clean up incomplete data needed). A hands-on, communicative valuation provider can leverage their experience working with many different audit firms to help their clients efficiently navigate these situations (by addressing auditor needs without overscoping a project).

Acquiring transaction data, particularly for niche sub-segments (e.g., hyperlocal delivery), presents an ongoing challenge in the realm of private transactions. Despite the assistance provided by databases such as Pitchbook, CB Insights, and Magnitt, establishing a robust dataset remains elusive. Maintaining a network of advisors with direct market access can help corroborate your analysis. Sensitivity analysis can be performed to cover your major deal breakers supported by Financial due diligence to validate the underlying numbers.

Communication and storytelling are paramount when you need to convey your valuation methodologies. No matter how good your valuation approach is, if a succinct communication does not back it it won't be heard. It's important to have a clear structure in mind. A structure is a bedrock for fruitful debates. No financial models are perfect so always be ready to accept feedback. Have a positive attitude. Remember that valuations are not complex - It's deemed complex because it's not backed by clear communication.

In a recent private equity deal, I led the valuation of a distressed manufacturing company with complex financials and uncertain future prospects. To ensure transparency and foster collaboration, I organized regular meetings with the finance team to discuss key assumptions and validate data inputs. Additionally, I sought input from industry experts to refine our valuation approach and address specific challenges related to market volatility and regulatory uncertainty. By fostering an environment of open communication and collaboration, we were able to generate a comprehensive valuation analysis that provided valuable insights to support the investment decision-making process.