RELIABILITY TEST OF AN APPRAISAL


Is this valuation accurate?

When a business is appraised, what guaranty do we have that the appraisal is reliable?

Remember that the vendor will ask for the sky but the buyer will only offer rock bottom.

Let's suppose you hire two Professional Evaluation Companies, which, with the same data, each one gets to a diffferent result, say one is $2,199,459 and the other $2,426,335.  You will tend to believe that your company is close to those values, because they are so close.

But, what would happen if the results were $2,199,459 and $7,372,912?  It could be that one evaluation was correct or both were wrong, but you'd definitely have reservations regarding a trustworthy evaluation of your company.

The appraiser or financial manager has the duty to find the correct value, therefore, the intrinsecal value of the company, without matter market values or the interest of the people envolved in the business affair.  To this end he has to pass at least by the followings tests :

  1. The submitted appraisal has to be intelligible to any financier of the world, be he Scandinavian, Mexican, African or Japanese.


  2. Make sure that for any “Projection of Expectations” (or scenario) chosen, it shows the General Ledger balanced.


  3. Also check that for any chosen “Projection of Expectations” (or scenario), the Statement Cash Flow is balanced.


  4. Show coherence when changing an advantageous or disadvantageous variable while maintaining all other variables constant.  When an advantageous variable is increased, while maintaining all other variables constant, the value of the business increases.  When this same variable is diminished, the value also diminishes.  On the other hand, when a disadvantageous variable is modified, maintaining all other variables constant, the value of the business is modified inversely.   In other words, when the variable increases the value drops and when the variable diminishes the value of the business goes up.  As an example, if there is an increase in sales (advantageous) and all other variables remain unchanged, the value of the business goes up.  If the cost of raw materials (disadvantageous) goes up while all other variables remain unchanged, the value of the business drops.


  5. When an appraiser is giving a lecture on Appraisals in Corporate Finance, he publicly shows transparency in his work.  See Curso de Avaliação de Empresa (only in portuguese).



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Isaac Hayon Sasson is a Mechanical Engineer, Executive MBA, specialized in Corporate Finance, consultant in the areas of corporate assessment, engineering projects, construction of factories, recovery of companies and company modifications.
E-mail : isaach@sti.com.br      Site : www.valordeempresa.com

"Always diversified when invests and use at least 15 companies.  Never puts all the eggs in the same basket. Our valuation efficiency depends on the veracity of the data collected from the company, not in its size"