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Business valuation is becoming more professional and relevant

April 9, 2018

With the advent of Registor Valuators, the practice of business valuation has rapidly professionalized. JBR wants to remain at the forefront of that development. 'To value well, you need to understand the context in which a company operates.'

The economy is accelerating worldwide. Companies need to change course regularly to stay afloat. Looking longer than a few years ahead is difficult. This offers opportunities, but also creates uncertainty. This new economic reality also has consequences for consultants, think managing partner Ronald van Rijn and senior consultant Rocher Hulst of independent consultancy JBR in Zeist. Whether it concerns strategy, corporate finance or restructuring, the issues that the clients of JBR present are more complex and often more urgent than before. In almost all of these issues - and within the M&A practice as a whole - high-quality knowledge about business valuation is indispensable. Hence JBR has strengthened its knowledge position in this area. Earlier, senior consultant Occo van der Hout was the first within JBR to obtain the title of Register Valuator (RV). Recently Rocher Hulst also completed the RV training.

Understanding the context

The Register Valuator is a relatively new phenomenon in the Netherlands. There are currently some 250 to 300 RVs affiliated with the Netherlands Institute for Registered Valuations (NIRV). They are therefore also subject to the institute's disciplinary rules, are obliged to devote at least 350 hours annually to the profession, and must undergo regular refresher training. The 'maths' behind a valuation is usually not difficult; that's adding and subtracting,' says Hulst. But the correct application of valuation methods and interpreting the figures requires knowledge and experience. To be able to value a company properly, you need to understand the context in which it operates.

According to Hulst, some advisors (and accountants) base their valuation too easily on rules and fixed formulas. He gives an example: 'When a buyer wants to acquire 100 percent of the shares of a target company, a control premium may apply. This represents the value of being able to exercise the majority of the voting rights. Some advisers apply a standard control premium of 20 percent. But that voting right is only worth something if the company is not optimally managed and there is therefore room for improvement under a new shareholder. If the company is already in good shape, there is no basis for the 20 per cent.

Shadow calculation

Register Valuators are now well established in the business world. The help of an RV is increasingly requested in the event of conflicts, for example. Sometimes this is even included in the articles of association or the shareholders' agreement,' says Hulst. Even in regulated markets, value is attached to valuations on objective, verifiable bases. Hulst gives the example of a company that is supervised by the ACM with regard to its rates. As the regulator, the ACM determines every three years the permissible return on capital employed (also called Weighted Average Cost of Capital, WACC). For this the ACM uses a fairly complicated calculation method. On request, JBR can make a shadow calculation. If it turns out to be more favourable, this will form the basis for a discussion with the ACM. Hulst: 'It is a complicated game. The statistical and econometric methods of the ACM are getting better and better. JBR can make the difference.

Making risks transparent

Business valuation is increasingly of strategic value, partly due to the changing takeover market. Van Rijn: 'Until recently, the emphasis of most transactions at JBR was on continuity and growth. With the rise of private equity, the focus has shifted to returns. Private equity parties want to be sure that they can sell a company for a profit within a short period of time. It is then very important that you have a clear picture of the expected value development and the proceeds upon sale. In the past, you would put your finger in the air, so to speak, to see which way the wind was blowing. That really isn't possible anymore. Prior to a transaction, we have to be able to give a reasoned valuation.' Hulst adds: 'By combining scenario analyses and valuation methods, you gain more insight into the possible value development and the associated uncertainty. That creates a framework for discussing the value drivers, risks and mitigants. In a world of great uncertainty and shorter company life cycles, providing insight into risks is more important than ever before. Valuations are also a good tool when making strategic decisions about divestments, for example when a conglomerate is reviewing its own portfolio.'

More realistic prices

Van Rijn predicts that the field of valuation will become increasingly professional: "We see this happening on the side of the client, the bank and the advisors. More and more technical knowledge is required. If we want to stay in the game, also internationally, we need an excellent toolkit. That's why we attach so much value to Rocher's RV title. A well-designed rating provides a solid theoretical framework for transactions. Above all, thanks to the specialist knowledge of an RV, we can give our clients a better negotiating position. That results in more realistic prices for transactions.

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