Spreadsheets: fancy calculators or god’s gift to valuations?
By Brett Goodyer, FCPA B.Com M.ForAccy – Forensic Accountant, Business Valuer, Bullshit Slayer
Think you can knock out a business valuation with a spreadsheet template and a few formulas? It’s the stuff between the formulas that adds meaning to your work.
Let’s call a spade a spade… spreadsheets have become the crutch of modern business valuations. I’m not saying I don’t love a good spreadsheet… I mean, I’m only (a nerdy) human. I’ve spent my fair share of nights wrestling in the ‘sheets’ with nested formulas and cascading errors. But the uncomfortable truth is that a spreadsheet isn’t a valuation system. It’s a tool that can be a risky if you don’t know exactly what you’re doing.
I’ve lost count of how many times I’ve seen a valuation that’s little more than a few cells multiplied by a random multiple. One tab, two assumptions, and zero context. And a valuation of $13 million…The calculations might be technically correct (in as much as 1 + 1 = 2), but they’re built on a pile of undocumented risk, unfounded assumptions, and a whole lot of “I reckon”.
The issue at hand is not just about the numbers, it’s about the blind trust we place in them. Once figures are entered into a spreadsheet, they seem to be sacrosanct. You’ll hear things like, “But my calculations in the attached spreadsheet indicate the business is worth $2.3 million!” and, whilst the appropriate response should be “Bullshit”, you should respond with something like “That doesn’t seem quite right. Could you explain your reasoning behind your numbers”. It’s important to remember that the spreadsheet simply performed calculations based on the data provided. And numbers on their own can’t consider business risks, procedures, and how the business operates. The numbers can tell a very different story without the insight of someone who knows better.
And as accountants, you know better.
You’ve got access to the story behind the numbers. You see the client’s behaviours, their systems (or lack thereof), their cash flow habits, and their team. You know who’s flying by the seat of their pants and those select few that operate like a well-oiled machine. But the spreadsheet doesn’t capture any of that, unless you build it in. A spreadsheet ‘valuation’ is the modern equivalent of a ‘back of the envelope’ estimate. It lets you skip the hard questions. You aren’t required to assess specific risks like “are these earnings sustainable?”, “How dependent on the owners is this business?”, “What level of working capital does this business need to continue to operate?” or “Is this stockpile of inventory helping or hurting the business?” And without considering these (and lots of other risks), we aren’t really thinking about the story behind the numbers. And let’s not ignore the risk to you as the adviser. If you’re using an old spreadsheet your predecessor handed down, or something you found online that promises ‘quick valuations’, you’re taking on all the risk of getting it wrong, without any of the control. One broken formula or wrong assumption, and suddenly your credibility is on the line.
That’s why I built BVOPro. Not because I wanted to sell software (though it’s nice when people subscribe), but because I wanted to build myself a tool that let me scale my valuation business without losing sight of the narrative behind the numbers. I needed to build structure into the process, not just the outputs. By collecting and assessing information on the risks inherent in each business I was able to understand so much more about the business from the outset that would let me shape my view of the business. It let me adjust the earnings of the business and consider an appropriate capitalisation rate, expected return on investment, or market based multiple. It doesn’t force me to adopt the predictions of my algorithm, but it does prompt me to ask the owner more questions, to delve into the story some more, and then present my findings in a consistent, evidence-based way that I can explain to anyone.
A valuation isn’t solving a maths problem. It’s applying a structure to an unstructured problem in a consistent, academically sound manner, that provides an answer that makes sense within the context of the narrative of the business and current market. But most importantly, it needs sound professional judgement, and an ability to weigh up the qualitative factors that spreadsheets don’t handle well. Using a spreadsheet or software that serves up an answer without your ability to consider the context and exercise your own professional judgment is just using a complicated calculator.
If you’d like to do valuations faster and more efficiently, head to www.bvopro.online and sign up for a free trial of BVOPro today.