A Fair Value Questionnaire Question Green Red Who is paying you to do this Payment reflects reasonable payment for Payment is disproportionately large, valuation and how much? Is valuation services rendered and none of the relative to valuation services provided, any of the payment contingent payment is contingent on outcome and/or a large portion of it is contingent on the deal happening? on deal occurring. Where are you getting the cash Appraiser estimates revenues, operating Cash flows supplied by management/ flows that you are using in this margins and cash flows, with input from board of company. valuation? management on investment and growth plans. Are the cash flows internally Currency: Cash flows & discount rate are in No internal consistency tests run and/or consistent? same currency, with same inflation DCF littered with inconsistencies, in assumptions. currency and/or assumptions. Claim holders: Cash flows are to equity High growth + Low reinvestment (firm) and discount rate is cost of equity Low growth + High reinvestment (capital). High inflation in cash flows + Low Operations: Reinvestment, growth and risk inflation in discount rate assumptions matched up. What discount rate are you A cost of equity (capital) that starts with a A cost of equity (capital) that falls outside using in your valuation? sector average and is within the bounds of the normal range for a sector, with no what is reasonable for the sector. credible explanation for difference. How are you applying closure A terminal value that is estimated with a A terminal value based upon a perpetual in your valuation? perpetual growth rate < growth rate of the growth rate > economy or a multiple (of economy and reinvestment & risk to match. earnings or revenues) that is not consistent with a healthy, mature firm. What valuation garnishes have None. A large dose of premiums (control, you applied? synergy etc.) pushing up value or a mess of discounts (illiquidity, small size etc.) pushing down value. What does your final judgment A distribution of values, with a base case value A range of value so large that any price in value look like? and statistics. can be justified.
A Fair Value Questionnaire Question Green Red Who is paying you to do this valuation and how much? Is any of the payment contingent on the deal happening? Payment reflects reasonable payment for valuation services rendered and none of the payment is contingent on outcome Payment is disproportionately large, relative to valuation services provided, and/or a large portion of it is contingent on deal occurring. Where are you getting the cash flows that you are using in this valuation? Appraiser estimates revenues, operating margins and cash flows, with input from management on investment and growth plans. Cash flows supplied by management/ board of company. Are the cash flows internally consistent? Currency: Cash flows & discount rate are in same currency, with same inflation assumptions. Claim holders: Cash flows are to equity (firm) and discount rate is cost of equity (capital). Operations: Reinvestment, growth and risk assumptions matched up. No internal consistency tests run and/or DCF littered with inconsistencies, in currency and/or assumptions. High growth + Low reinvestment Low growth + High reinvestment High inflation in cash flows + Low inflation in discount rate What discount rate are you using in your valuation? A cost of equity (capital) that starts with a sector average and is within the bounds of what is reasonable for the sector. A cost of equity (capital) that falls outside the normal range for a sector, with no credible explanation for difference. How are you applying closure in your valuation? A terminal value that is estimated with a perpetual growth rate < growth rate of the economy and reinvestment & risk to match. A terminal value based upon a perpetual growth rate > economy or a multiple (of earnings or revenues) that is not consistent with a healthy, mature firm. What valuation garnishes have you applied? None. A large dose of premiums (control, synergy etc.) pushing up value or a mess of discounts (illiquidity, small size etc.) pushing down value. What does your final judgment in value look like? A distribution of values, with a base case value and statistics. A range of value so large that any price can be justified.
fairvaluequestions.docx