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Who prepares business valuation – an advisor or a client’s attorney?

Dawid STOLAREK
Corporate Finance Manager at RSM Poland

It is evident that in the free-market economy, especially in branches with low entry barriers such as consulting, a customer has a special position. It is our client who, as a buyer of goods and services, determines the success, or failure, of business we – professional advisors and consultants, run.

Who decides on everything?

Enterprise valuation is, or rather should be, an independent opinion on the value of a company. However, the customers asking for valuation often have their own clear-cut view on what the result of the valuation should be. To their mind, the valuation document is just to prove their initial assumption and to support future actions they have already planned.

Where do these expectations come from? If the person asking for valuation is the owner of an enterprise, it is usually interested in the analysis that would include the highest possible price. If the owner is considering the sales of the shares or stocks it possesses, the document that values such assets high would be a significant tool strengthening its negotiating position. In this case, striving to generate the highest possible revenue, the customer is motivated to put pressure on the consultant. Sometimes many years of engagement into the company development make its owner believe in high value of the business. It must, however, be borne in mind that all subjective factors will not influence the assessment made by the market.

Similarly to the above situation, the entity that is as a prospective buyer will use all arguments available which, in the eyes of the consultant preparing valuation of the company acquired, may contribute to the undervaluation of such company.

Impartiality of the opinion – the foundation of enterprise valuation quality

How should a consultant preparing valuation act when being put under client’s pressure? Should the consultant be an independent advisor using its own judgment, or maybe act as the customer’s attorney, whose role is to work out the outcome that would be most favourable for the client? To answer this question, it is necessary to determine fundamental assumptions for enterprise valuation. One of such assumptions is an adopted value standard, which determines the interpretation of the valuation result.  Most frequently, it is assumed that the prepared valuation meets fair value standards. According to IFRS 13, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. These conditions implicitly mean that the parties to the transaction act voluntarily and possess the necessary knowledge in order to form an opinion on a real value of the object of the transaction. Therefore, applying a fair value standard excludes any modifications that could, in a biased way, influence the result of enterprise valuation. A consultant responsible for preparing the valuation shall act independently, and take the client’s arguments into account only to the extent that such arguments actually influence the estimated value of the enterprise when applying the aforementioned value standard.

There are always deviations from the rule

Is it possible to prepare the valuation document that would present the value of an enterprise based on the assumptions that, in terms of the consultant’s knowledge, are hard to consider as the most likely?  Yes, it is. However, it should be stressed that such document would be more a simulation than a real valuation and could only serve internal purposes of the client. Relevant information and restrictions in this regard shall be included in the valuation report.