Valutico's Qualitative Assessment (QA) tool is a powerful feature designed to help valuation experts perform subjective risk assessments for private companies. By considering various risk factors, this assessment assists in determining the appropriate Cost of Equity (CoE) Premium and Discount to apply to peer trading multiples—a critical step when conducting Discounted Cash Flow (DCF) and Trading Comparables valuations.
Why qualitative assessment matters
In the world of valuation, applying discounts and premiums can be a complex, subjective task. Valuation experts often wrestle with determining the right discount for lack of marketability (DLOM). Valutico's Qualitative Assessment goes beyond DLOM by considering a range of potential risks that set smaller private companies apart from larger, publicly-listed peers.
The challenge lies in the subjectivity of these discounts and premiums. They can vary significantly from one practitioner to another. Valutico's Qualitative Assessment feature provides a structured approach, offering a granular breakdown of these discounts and premiums. This systematic method promotes consistency across different valuations, ensuring a well-reasoned risk assessment.
Start or skip: the choice is yours
It's important to note that not all valuation standards accept individual risk premiums, such as IDW S1 in Germany, KFS BW1 in Austria, or IFRS 13. Valutico provides the flexibility to choose whether to start or skip the Qualitative Assessment step. Skipping it defaults to a CoE Premium and discount to trading multiples of 0%.
However, whether you complete the QA step or not, you always have the option to manually adjust these values. On the Peer screen, at the bottom of the list, you can overwrite the discount applied to all multiples or each multiple individually. Similarly, you can adjust the CoE Premium in the "Change Parameters" tab on the Valuation Overview under the Discount Rate header.
Weighting and risk factor calculation
Each risk factor assessed in the QA has a predefined weighting. These default weightings reflect the general consensus on which factors are more critical when comparing a company to its peers. However, Valutico allows you to customize these weights to align with your preferences. Just remember, the sum of the weightings must always equal 100%.
For each risk factor, you can assign a rating using a slider. A rating of 1/5 on the far left indicates low risk, while 5/5 on the far right signifies high risk. The selected risk factor rating is then multiplied by its assigned weight to calculate the overall Risk Factor, displayed at the bottom left of the assessment.
Calculating CoE premium and discount
The Risk Factor calculated in the previous step is the key to determining the CoE Premium and Discount to Trading Multiples. These figures are derived using the following formulae:
For a medium-risk company (Risk Factor of 3), the defaults are typically a CoE Premium of 5% and a Discount to Trading Multiples of 30%. These defaults are commonly applied to mature companies in developed markets globally. However, if your target company falls outside this category, you have the flexibility to adjust these values according to your analysis.
If your company is deemed riskier or less risky than the medium (3/5), the CoE Premium and Discount are adjusted based on the formulae provided.
The Qualitative Assessment tool in Valutico empowers valuation experts to make informed decisions about discounts and premiums, enhancing the accuracy of their valuations. By systematically considering risk factors, customizing weights, and applying your expertise, you can confidently arrive at CoE Premiums and Discounts that align with the unique characteristics of the businesses you value.
Remember, while Valutico provides default values and systematic calculations, the final determination of discounts and premiums should always reflect your professional judgment and the specific context of each valuation. With Valutico's Qualitative Assessment, you're well-equipped to tackle this essential aspect of the valuation process.