How can you explain a valuation adjustment to a client?

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Valuation adjustments are often required when valuing a company or an asset based on market data, such as comparable transactions, multiples, or discounted cash flows. They reflect the differences between the market data and the specific characteristics of the company or asset, such as size, growth, risk, liquidity, or control. In this article, you will learn how to explain a valuation adjustment to a client in a clear and concise way.

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Use visual aids:

When explaining complex valuation adjustments, employing visual tools like charts or tables can make the information more digestible. This strategy helps clients grasp the nuances and implications of each adjustment for their company's value.
Promote inquiry:

Encourage clients to ask questions throughout the valuation process. This fosters a collaborative atmosphere where clients feel involved and can better understand how each adjustment impacts their business's valuation.

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Partho Dey

Valuation & Biz Modelling Analyst |…
Matheus de Souza Barboza

E-commerce | Marketplaces | Finan?as |…

1 Why are valuation adjustments needed?

Valuation adjustments are needed to ensure that the market data used to value a company or asset is relevant and comparable. For example, if you are using the price-to-earnings (P/E) multiple of a similar company to value your client's company, you may need to adjust the multiple to account for the differences in growth rates, profitability, capital structure, or industry outlook. Similarly, if you are using the discounted cash flow (DCF) method to value your client's asset, you may need to adjust the discount rate or the terminal value to reflect the risk and uncertainty of the cash flows.

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Matheus de Souza Barboza

E-commerce | Marketplaces | Finan?as | Estratégia | Consultor | Conselheiro | C-level | Valuation
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Informa??es Desatualizadas: Se as informa??es usadas na avalia??o estiverem desatualizadas, é crucial ajustar os valores para refletir a realidade atual da empresa. Mudan?as no Ambiente de Mercado: Altera??es significativas no mercado, na economia ou na indústria podem impactar o valor da empresa, justificando ajustes na avalia??o. Riscos e Oportunidades N?o Considerados: Se a avalia??o n?o contemplou riscos ou oportunidades específicos que afetam a empresa, é necessário ajustar para refletir esses fatores.

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☆ Deshraj Mahajan

Senior Associate, Investment Banking | M&A | Fundraising | Financial Modeling and Valuation
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In business valuation, Transaction Comparable, Public Trading Analysis, and DCF are essential for a comprehensive Valuation range and sensitivity analysis. The P/E multiple is critical for comparing stock price to earnings, but adjustments may be necessary for accurate valuation considering growth rates and profitability. Similarly, adjusting the discount rate in DCF is vital for reflecting time value of money and risk, ensuring a realistic present value. Both adjustments refine valuations based on specific attributes and risks of the analyzed company or asset.

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2 How to calculate valuation adjustments?

Valuation adjustments can be calculated in different ways depending on the type and source of the market data. For example, if you are using comparable transactions to value your client's company, you may apply a premium or a discount to the transaction price based on the relative attractiveness of your client's company. This can be done by using a valuation matrix that assigns different weights to various factors, such as growth, profitability, synergies, or strategic fit. Alternatively, if you are using multiples to value your client's company, you may adjust the multiples by using regression analysis or industry benchmarks to isolate the impact of each factor on the multiple. For example, you may use a formula like P/E = a + b * Growth + c * ROE + d * Leverage + e * Industry, where a, b, c, d, and e are coefficients derived from historical data or industry averages.

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☆ Deshraj Mahajan

Senior Associate, Investment Banking | M&A | Fundraising | Financial Modeling and Valuation
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To calculate valuation adjustments: Discount Rate Adjustment: Adjusted?Discount?Rate=Risk-Free?Rate+Risk?Premium Adjusted?Discount?Rate=Risk-Free?Rate+Risk?Premium Adjust the discount rate for the time value of money and risk. P/E Multiple Adjustment: Adjusted?P/E?Ratio=Comparable?P/E Adjustment?Factor Adjusted?P/E?Ratio=Adjustment?Factor Comparable?P/E Terminal Value Adjustment (DCF): Adjusted?Terminal?Value=Terminal?Value ×(1?Terminal?Value?Adjustment)Adjusted?Terminal?Value=Terminal?Value ×(1?Terminal?Value?Adjustment) Sensitivity Analysis Adjustment: Adjusted?Valuation?Range=Base?Valuation±(Base?Valuation×Sensitivity?Factor)Adjusted?Valuation?Range=Base?Valuation±(Base?Valuation×Sensitivity?Factor)

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3 How to present valuation adjustments to a client?

Valuation adjustments should be presented to a client in a transparent and logical way. You should explain the rationale and the method behind each adjustment, and provide supporting evidence and data. You should also show the sensitivity and range of the valuation adjustments based on different assumptions and scenarios. For example, you may use a table or a chart to show how the valuation of your client's company or asset changes with different growth rates, discount rates, or premiums. You should also highlight the key drivers and risks of the valuation adjustments, and how they affect the value proposition and the negotiation strategy of your client.

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☆ Deshraj Mahajan

Senior Associate, Investment Banking | M&A | Fundraising | Financial Modeling and Valuation
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For DCF, The sensitivity table is considered one the best possible ways to represent valuation range. If we have Enterprise value from all the three methodologies, then football field charts are considered the best way of representation

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4 How to handle objections or questions from a client?

A client may have objections or questions about the valuation adjustments, especially if they are unfavorable or complex. You should be prepared to address them in a professional and confident way. You should acknowledge the client's concerns and provide clear and factual answers. You should also demonstrate your expertise and credibility by referring to industry standards, best practices, or previous cases. You should avoid being defensive or aggressive, and instead focus on finding common ground and building trust with the client.

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Partho Dey

Valuation & Biz Modelling Analyst | Corporate Professionals
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Provide a client with an explanation of a valuation adjustment that is straightforward, highlights important changes, and makes use of visual aids. Link the modification to industry standards while highlighting the valuation process' impartiality. Recognize and respond to client concerns by providing contrasts and other possible outcomes. Speak clearly, be open to inquiries, and show adaptability when faced with shifting conditions. Make future expectations clear and, if needed, attach more documentation. Maintain constant contact to promote openness and trust in the appraisal procedure.

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5 How to follow up with a client after explaining valuation adjustments?

After explaining valuation adjustments to a client, you should follow up with a written summary and a detailed report. The summary should highlight the main points and the key takeaways of the valuation adjustments, and the report should provide the detailed calculations and data sources of the valuation adjustments. You should also invite the client to provide feedback and ask any further questions. You should also monitor the market conditions and the performance of your client's company or asset, and update the valuation adjustments if necessary. You should also keep the client informed of any changes or developments that may affect the valuation adjustments or the deal process.

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Partho Dey

Valuation & Biz Modelling Analyst | Corporate Professionals
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Give a client a thorough explanation of the modifications, highlight the main points, and use illustrations when explaining a value adjustment. Make sure the modification is impartial, tie it to industry standards, and use straightforward language to address any concerns. Promote inquiry, offer substitute situations, and highlight the process's adaptability. Make future expectations clear and provide continuing assistance. Send a thank-you note, go over the main points again, and answer any more questions after the explanation. Throughout the appraisal process, build trust and transparency by sharing pertinent documentation, outlining future communication strategies, getting comments, and remaining reachable.

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6 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?

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Matheus de Souza Barboza

E-commerce | Marketplaces | Finan?as | Estratégia | Consultor | Conselheiro | C-level | Valuation
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Métodos de Avalia??o Apropriados: Utilizar os métodos de avalia??o mais apropriados para o setor e as características específicas da empresa é fundamental, podendo exigir ajustes. Erros: Caso haja erros nos dados ou na metodologia de avalia??o, é preciso ajustar para corrigir esses equívocos. Comunicar esses ajustes de maneira transparente e demonstrar como eles contribuem para uma avalia??o mais precisa é essencial para garantir a compreens?o do cliente e gerenciar sua expectativa.

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How can you explain a valuation adjustment to a client?

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1 Why are valuation adjustments needed?

2 How to calculate valuation adjustments?

3 How to present valuation adjustments to a client?

4 How to handle objections or questions from a client?

5 How to follow up with a client after explaining valuation adjustments?

6 Here’s what else to consider

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