Recent valuation work has reiterated some of the fundamentals of valuation, and highlighted some recent changes:
- The market doesn't lie - but it does have preferences, and what you can do with a business may unlock value ignored by the average of the market opinion. The point is that if you turn out not to be as clever as you thought you were, then the market number will prevail when you have to get out of your investment.
- Value doesn't change just because you changed the valuation method. If using a multiple of renewals generates a markedly higher or lower number than a discounted cash flow that is telling you something about your assumptions in the DCF, or your business, or both. Look harder, or take advice.
- Specialised businesses are worth more than general practices. Interesting - can you make your business worth more by simply narrowing your product range? no, of course not. Specialisation is more than that. When done right your customers are more loyal because they sought you out and/or have fewer alternatives.
- If you are buying to hold then you should work on a DCF, if you are buying to sell, use the basis used by your market.
- Changes in law and regulation have less effect than we thought: the rule of thumb is 'well, if muggins can comply, then with care and effort, I can certainly comply'. Effects of law and regulation are most keenly felt at the margins: making tiny and marginal businesses fail. Forcing out people who were really not complying anyway. Slowly increasing barriers to entry, making a licence more valuable.
- Risk matters, and the portfolio effect is real. A poor reputation, a concentration of large cases, and aggressive insurers all have an effect on business value.
- There can be a significant regional effect. Small town businesses have fewer buyers.