Writing for Business Valuation Update, Andrew Strickland (Scrutton Bland Chartered Accountants) notes that new techniques are now ‘sweeping away’ business valuation methodologies that have held sway for decades in the UK. Based on presentations he’s made to the ICAEW and other groups, Strickland documents the “seismic shift” in areas such as credentials and standards. ‘The competencies in evidence range from the specialist business appraisers working within the Big Four, together with other firms such as Duff & Phelps, FTI Consulting, and some specialist valuation boutiques at the top of the food chain. We then proceed by gradations, down to the lone sole practitioner with a hazy notion of business valuation based on some valuations undertaken for tax purposes long ago,’ Strickland writes.
Given this competency vacuum, ‘some firms provide their own internal training and others put their valuation teams through the ASA’s training program. Others use the CFA.’
Strickland turns to the manner in which business valuation disputes are now being argued in the courts to emphasise the evolution. ‘There is now far greater sophistication in the valuation tools that are used in practice, and those who are serious in their business valuation work recognise the importance of improved computational methods,’ he writes—with specific reference to the use of PE ratios from public companies.
Among other factors, Strickland highlights legal system reform, including the lack of anything comparable to the Daubert challenge against experts within the UK system. He also examines the dominance of the market approach (particularly for fiscal valuations prepared for HMRC) and the relative lack of good financial research resources that support business valuation.
Market approach dominates: For a very considerable number of years, the courts showed a robust resistance to the use of DCF techniques. They were suspicious that modest changes in assumption could have major impacts on value. However, this has changed over the last seven years, and now the DCF has been the main driver of the valuation conclusions in a small collection of cases.
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