Valuations are a critical component of the finance function, and while there are numerous approaches and use cases for valuations, there are certain universal guidelines to keep in mind when approaching the task. This is outlined in manuals such as the comprehensively titled American Institute of CPAs, or AIPCA, Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies.
In an impromptu survey of the room during a working group session at the 2020 PEI CFOs and COOs Forum in New York, a packed crowd of attendees mostly raised their hands to note that they utilize multiple valuation methods, while a small handful noted that they rely on a single method for their valuation exercises. “Whatever methods are used” and however they may be weighted in an aggregation of methodologies, “consistency is important,” according to the expert panelists leading the session.
Equally important is ensuring that valuation data is as current as possible to the moment when the valuation is timed, the panelists said, so long as the data being used fall within the definition of what is known or knowable as of the date that the valuation is hinged upon. That is to say, if an event occurred several days after the valuation date but prior to the completion of the valuation exercise, that event would not have been known or knowable as of the date that the valuation is hinged upon. However, the panelists said that in the interest of full disclosure, subsequent events could be included as a footnote. Alternatively, a secondary valuation that includes that information could be prepared.
The panelists warned against relying too heavily on co-investor valuations when they are available since auditors will press for information about what made the evaluator feel comfortable with the co-investor’s conclusions. “Even if those are available, you need to hone them,” the panelists said. They also cautioned against relying on a valuation that was completed for an alternative purpose than that which an evaluator is focused on. “If a valuation has been done for one purpose, it doesn’t necessarily mean it will be applicable for all purposes.”
A fair bit of the conversation around valuations centered around the AICPA’s recommendation for use of a calibration method that considers both observable and unobservable inputs that will be used in the valuation process and anchors those inputs against a target date as a means of framing market movements and shifts in performance. Calibration, the panelists said, can be a reliable way of adding objectivity to the fair value price determination and managing biases. “Fair value as an exit price, it’s not the excitement or emotion, or the attachment to your companies, but what you’re going to get from market participants on the balance sheet day,” the panelists said.