In recent years, we have faced several national and international crises. In addition, we face rapid developments in innovation and ICT.
From the pandemic, the war in Ukraine and unprecedented price increases (and decreases) to rapidly rising capital market interest rates and a construction and housing crisis, as well as developments in big data, the rise of ChatGPT and the increasing risks of hacking and ransomware.
All these developments affect entrepreneurs, businesses and thus economic value. And how do you deal with this as a valuation expert?
'Predicting the future'
A valuation expert is a professional who makes business calculations based on experience, skills, knowledge and insight. This determines the economic value of a company, a package of shares or a business unit. The valuation expert considers the risks, uncertainties and time required to realize the expected incoming and outgoing cash flows.
This gives business owners and potential investors insight into future returns and forms the basis for investment decisions. Thus, the main focus is on the future. But how do you "predict" the future in turbulent times?
If the future were as predictable as historical financial data, the valuation profession would not be so challenging. The value of a company could then be calculated fairly easily by using so-called market multiples.
In times of uncertainty, however, these multiples are not a sufficient basis for a fair valuation. This is because the method does not take into account uncertainties in the future, let alone the challenges entrepreneurs currently face. This requires a different method.
A fair valuation
So reliable valuation requires more. To what extent can future developments affect the company's cash flows? Of course, this takes into account developments in the industry and macroeconomics, but "predicting" the right (economic) trend also requires looking extensively at the past.
Finally, the question is: What is the impact of developments on the company and how does it respond? If there is uncertainty about the company's agility, this will affect the risk profile and the outcome of the valuation. If the entrepreneur or management is able to recognize the consequences and correctly project them into the future vision and business plan of the organization, this can even lead to a higher valuation outcome.
Keeping a grip on value
Being agile and anticipating change, in other words. Incidentally, experience shows that businesses that are in the lead are not necessarily the most successful at this. This is also called the law of the inhibiting lead. What is left of the value of world players such as Kodak, IBM, General Electric and Nokia?
For optimal value development in these turbulent times, it is especially important to keep a close eye on what is going on in the industry, monitor competitors' reactions and follow best practices. A valuation also provides insight into where the value drivers and vulnerabilities lie. Insight that enables you as an entrepreneur to effectively manage and maintain a grip on the value of your company or future investment.
