As we learned the hard way from some rather embarrassing high school experiences, trying to convince your math teacher that an answer is correct because “it just feels right” doesn’t tend to get you very far.
So we were surprised to learn that some CFOs may be trying to pull a similar trick when it comes to portfolio company valuations. During a recent lunch with an industry auditor, he relayed a conversation he’d had with a CFO who admitted that some of his colleagues were tweaking the assumptions they used in the valuation process – in order to reach a number that was in line with their “gut feel” of what the company could be sold for that day.
As our auditor friend put it: “It’s unbelievable he would admit some GPs were backing into their numbers!”
Of course, unlike arithmetic, valuation is almost as much art as it is science – there isn’t necessarily a black and white answer, making judgement calls a necessity.
On the other hand, we can’t help feeling that it’s not very smart to openly admit to your auditor that you’ve been tweaking your assumptions to get to a certain mark, rather than vice-versa. After all, auditors have far worse punishments than after-school detention in their locker.