Benham & Reeves, the London estate agency, reports that 43% of UK house sales since COVID-19 (through May 2021) were sold despite being down-valued by their RICS. This suggests a large number of buyers (about 350,000, according to the report) with signed purchase agreements experienced the sobering moment of sensing they’d paid more than they should.
Perhaps there’s a lesson here for business valuations. The role of official valuations of real property are not always understood by buyers—and perhaps less so in the artificial buying market for homes tax relief and the UK’s quantitative easing programmes partially create. Is the same true for BV? Is the reason for this that valuers don’t explain the process or their standards of value well?
Business valuation principles are often sidelined during M&A because the valuation, if it occurs at all, comes late in the process and after a lot of anecdotal evidence or “guesstimates” from both the buyer and the seller. The concept of market value has often been assumed into asking prices or negotiated (synergistic) offers long before any professional business valuation. Often, both sides of a business transaction have employed optimistic and probably unrealistic forecasts for both the tangible and intangible assets.
The acceleration of SPACs, which delist assets, and financial buyers who have financial strategies to accelerate earnings beyond open-market values contribute to what may be an increasing gap between business valuation and deal values. Much of this gap eventually ends up on balance sheets as goodwill, where it is often eventually impaired.
Are we as a profession failing to recognise the transaction market environment that often considers a business valuation to be unnecessary—or an administrative step in the closing process? When business valuations are performed earlier in the process and better understood by the principals, they become a benchmark for both buyers and sellers, so they must more consciously decide whether the deal is worth the additional consideration.