When it comes to any transaction, valuation is always paramount and foremost in mind. So getting it 'right' has to be more than a good gut feeling. The pressure to get it right comes not only across the negotiation table but also from within your own organisation: experienced negotiators know only too well that the biggest block to a valuation can come from within rather than from the other party. So what can we do to get it right and is it worth all the pain?
Why do we do valuations in the first place? Because they provide important clues or arguments to the possible or probable value of a project, product or company, and can provide you with confidence and credibility across the negotiation table - and the more rigorous the valuation method you use the more confident you will be in arguing or defending a valuation position.
The problem most negotiators face is communicating the effectiveness of their valuation method and providing confidence to the other side that the assumptions that have been used are correct. In this sense benchmarking is the easiest method to communicate: by simply pointing to a particular deal one can very quickly establish one's position. However, benchmarking on its own has limited utility. For example, the number of comparator deals may be few and the financial details may not be satisfactory. Moreover, individuals will often point to one or two high-profile deals as the preferred benchmark, which puts enormous strain on a negotiator to match the value, even if this has no compelling arguments in its favour.
"The valuation method you use can provide you with confidence and credibility across the negotiation table. The more rigorous the method the more confident you will be in arguing or defending a valuation position."
If a more sophisticated valuation methodology is used it is more difficult to communicate - and this problem can be both internal and external. At PharmaVentures we prefer an integrated approach to valuations that includes both benchmarking and discounted cash flow (DCF) based modelling. The use of DCF models with decision tree analysis and Monte Carlo simulations starts to provide more parameters by which one can assess value for the transaction concerned. These are of course dependent on the assumptions used, and negotiators don't always feel comfortable about communicating those. The problem here is that the other side can have a feeling of mistrust. This is not the best way of developing a relationship, and a close alliance may be needed for the deal to be implemented effectively. Individuals not familiar with the methodologies used will also look on them with suspicion, and such people may even include the board members of your own company! Key to overcoming these issues is improving the knowledge of valuation methodologies for all those involved in transactions and, in particular, the decision-making process. Doing this can empower the negotiator and the whole company.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd