Company Valuation – The use of perception in markets or industries with lack of information


We understand perception as the way a person perceives or understands something. According to the new encyclopedia, it is the organization, identification, and interpretation of sensory information in order to represent and understand the environment. In fairly new industries, with few participants or in emerging markets, the availability of information is a recurring situation and may cause a disadvantage to those conducting studies to provide a final value or a specific segment of a company; it is because of the above that the perception plays an important role in determining the variables of the calculation of the fair value.

Good practices eliminate the use of perception due to the simple fact that any variable must have a real and supportable basis to ensure the reasonableness of the values obtained during valuation. However, given the lack of information inputs, an appraiser has two paths:

  • Suspend the value determination, which in many cases is very unlikely to happen because the valuation is unavoidable by cases arising from mergers, acquisitions, divestments, refinancing, etc.
  • Use similar variables, which at the end will always have an effect generated by the perception of the appraiser in determining what is similar.

There are many factors that can affect a person’s judgment. George Gerbner’s cultivation theory demonstrated empirically that the audience’s reaction will not always be uniform, but that after a continuous exposure of the same content, in the long run, such messages will have an effect, perhaps not on behavior of the individual, but in the way he sees the world, that is, his perception of the world. This is applicable to an analyst in charge of determining the amount of income projected for a specific activity using a method based on the discounted cash flow, which tries to determine the value of a company by estimating the flows of Money they will generate in the future, and then be discounted at a rate based on their risk. A misperception of an analyst who really likes products that use sugar substitute sweeteners can generate an overestimated income for a company that produces beverages that use this ingredient, solely because it seemed to him that all people would like to drink this product just like him, without taking into consideration the real number of people who would really take this drink which contains such ingredient.

Cases like the previous one, where cash flow exhibited money funds greater than they could actually be generated, can be much more recurrent due to information search techniques, which do not have an effective strength that determines reasonable values which will be generate totally incorrect and inaccurate cash flows (if discounted flow methods are used to determine the value of a business).

To avoid situations like the one above, here you can find some recommendations on how you can make your search more effective and eliminate the direct effect of perception in your valuations:

  • Avoid using Google as your only source of information: While in recent years, Google has established itself as the best and largest search engine for Internet content, it is important for appraisers to look for additional sources that are outside such as city records, tax information from other companies, etc.
  • Use of surveys: As far as possible, the analyst could use surveys to not only be an information user, also a generator.
  • Use information from official government entities: Statistics that run government official institutes are basic guidelines.
  • Affiliation to private databases: There are companies that collect data and charge for providing specific information about a particular industry. Generally, these organizations also request that participants also provide information to continue feeding the database.
  • Use of third-party experts: Whenever possible, it is convenient to use the services of third-party experts who can guide us and even provide additional statistical information.
  • Use of similar companies’ information: The fact that a specific brand has a specific sales behavior does not mean that it will be the same in all markets; however, it is a valid and viable base as a reference for information.

The determination of the valuation method depends on the purpose with which it is being carried out, it is not the same to evaluate a company to be sold to a group of investors, than to evaluate one that company that is expected to liquidate.qtq80-p5xqmo

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