KRISTY KERSWELL
Business Valuation Automation: Future or Fantasy? An opinion article analysing the successful of current attempts to automate business valuation, the likelihood of this happening in the near future and potential challenges that will arise in this area. In late 2020, UNSW alumnae Benjamin O’Dea and Edward Johnson set out to solve a pervasive problem for business brokers: the fact that only 20% percent of listed businesses sell. According to O’Dea and Johnson, the reason for this is that businesses are often incorrectly valued. Their solution to this problem is the newly launched start-up, Negotium. Negotium creates automated business valuation reports, which are primarily based on the past performance of the business, and to a lesser extent, the assets owned by the business. However, whilst many attempts have been made to automate business valuation and to replace standard financial theory and analysis with machine learning, most have proven unsuccessful. This is because business valuation is largely dependent on factors which cannot be accurately assessed by an algorithm, and which require an expert, experience-based perspective.
Secondly, a forensic analysis is often required to ascertain the true value of the assets and liabilities on the business’ balance sheet. For example, the depreciated value of an asset is often not indicative of the true value and therefore must be appropriately adjusted, which will result in the financial position of the business shifting. Property values can sometimes be over or under-stated. When employing the discounted cash flow method, all projections must be appropriately qualified, and there must be an assessment of whether they are feasible and not overly optimistic or pessimistic. Assessment of Risk & Industry Conditions Machine learning cannot accurately assess the current conditions and future outlook within an industry, especially when there is not enough data available to evidence the impacts and predict trends. Notably, O’Dea and Johnson neglect to apply any discount to their valuations of businesses in the hospitality industry and rely on pre-COVID-19 data for multiples. For example, the impact of COVID-19 on business valuations has been pervasive, with the pandemic having different impacts on all industries, resulting in some profiting greatly and others suffering significant pandemic induced losses. An experienced opinion is required to balance pre and mid-COVID performance and the likely risks and opportunities going forward for a business as the pandemic passes.
All of these factors must be considered when determining a value, and these vary widely from business to business. This evidences the fact that Forensic Analysis & Auditing A valuation model is only as accurate as the data business valuation is not merely a rigid, formulaic that it has relied upon. Whilst a valuation model calculation, but rather a holistic view of the may provide an adequate basis of methodology, business’ value. Business valuation is dependent all information must be appropriately qualified on the individual characteristics of the subject, and requires a level of creativity to envisage the Firstly, tax efficient structuring is often implemented to reduce a business’ obligations, strengths, weaknesses, opportunities and threats and how these will be perceived in the market. and this will impact the profitability of the business. Without appropriate adjustments, this can result in a radical undervaluation of a business, and a value that is not indicate of what it would sell for on the open market.
AVI ISSUE 2 2021 PAGE 7
