Your Business Valuation Software has CRASHED (!) {What Now?}

MK Logo ShortYour Business Valuation Software has CRASHED (!)
{What Now?}

crash bike

Tell My Boss I’ll Be in Late!

Business valuation has been described (by very many) as part Art and part Science.  And while this is true enough, I find it more accurate to describe the activity of appraising businesses and business interests as “Quantitative” and “Qualitative”.  We are neither scientists, nor artists – generally, I think.  In this post, I will explain why I believe that BV SW has gained favor – and how its use can be hazardous!

Business Valuation People are Weirdly Subjective Quants!

We work in the realm of the qualitative (assessing the background and expertise of company management, i.e. being “subjective”) as much – or more as the quant-stuff (common-sizing, ratio analysis, rNPV, OPM, etc).   Further, experience and judgment define our capabilities – and absence of these “soft-skills” will never be substituted by quant smarts alone.  Some might suggest that “you either have it – or you don’t”, and by this I believe that they are suggesting that those who can crunch numbers AND who can support their subjective judgements are best suited (another topic).   The point is this: the propeller-headed quant genius can model nearly any elaborate conversion feature’d instrument, but would you trust this person to explain it to the CFO?

Business valuation requires human judgement, experience …. and analytical acumen.

Nor are we software programmers or coders, generally, I think…although I am beginning to wonder.  Still, much of what a business valuation professional does – analytically – can be translated into code; especially the most basic or simplified analysis tasks.  I once created simple code to search for guideline public company financial information via several finance-related URLs – and then populate a database and an excel sheet which would crunch the multiples – and even the adjustments for size (k) and growth (g). My code was nothing elaborate, but it worked, it was (mostly) accurate, and it created efficiencies in a significant portion of my work.  It did, however, crash (more accurately, it was monetized).  As such, I was forced to consider two alternatives: a.) Purchase access to the data or b.) Regress to the archaic hand-entry.  The point is that reliance on the program created a dependency, and this dependency resulted in an interruption.  Thankfully the interruption was not significant, but this experience created instability and uncertainty in my work – and it provided for me a fundamental lesson: business valuation requires human judgement, experience …. and analytical acumen.

Economics-of-Cheap Drive Many to Use of BV Software

And today (2016), we are given access to things much more algorithmically potent than some old-school, simplified Excel VBA string for pulling GPC data into a spreadsheet.  Business valuation software has now become – for many – a low-cost alternative for entry into business valuation.  These players would argue this fact; and exclaim that they are “using technologies to increase efficiencies and meet market demands”; which is true!

Three technology advances have emerged to allow for the creation – and use – of complex algorithm-based business valuation software solutions; and which, by extension, permit novices and the highly-experienced alike, to “meet market demands”.  First was the monetizing of data, and with this, the creation of stabilized, efficient (affordable) SaaS-based platforms.  Finally, the availability of low-cost, offshore’d, coding sweatshops provided ample access to software coding.  The basic technological components were established. 

The fundamental business reality that has allowed BV software to gain a foothold in our industry is “The Economics of Cheap”. 

However, the fundamental business reality that has allowed BV software to gain a foothold in our industry is “The Economics of Cheap”.  IF you have had any contact with the business-development activity of your firm, then you understand cheap; because you are either bidding against cheap or you are being cheap (I am not judging, I am observing).  There seems no longer to be a middle ground on price; this is perhaps most-especially true in the delivery of compliance-related BV services.  And what may be considered a technologically potent solution can also be easily abused.  Worse still: reliance on today’s business valuation software can create multiple dependencies that, if the code crashes (rather, when the code crashes), will seriously interrupt a BV practice.

Most prominent in the delivery of such cheaply-priced BV engagements is the emergence of IRC-409a software offerings.  If you provide 409a engagements, then you have likely been approached to purchase a software-based valuation solution.  One particular firm will offer their solution “by the engagement” and even suggest that auditors have approved its use.  Others offer a subscription service. 

The Delightfully Powerful [and Very Dumb] Algorithm

At the heart of these solutions is their algorithm, which is “a process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer.”[1]  Algorithms give life to most applications where computers process data by a sequence of operations that can be simulated.    Algorithms can be expressed in many kinds of notation, including natural languages, flowcharts, programming languages and control tables.  A simple algorithm is illustrated below – I did not write it.

algorithm

 

 

 

 

 

Any business valuation software program that operates using an algorithm is subject to the following characteristics.  Because the program is written using one or more types of code, each “area” of the program is inherently unstable, limited to the specific instructions and subject to immediate obsolescence. 

  1. An algorithm is a precise list of specific steps, the order of computation is always critical to the functioning of the algorithm.
  2. Instructions are usually assumed to be listed explicitly.
  3. For some such computational process, the algorithm must be rigorously defined: specified in the way it applies in all possible circumstances that could arise. That is, any conditional steps must be systematically dealt with, case-by-case; the criteria for each case must be clear (and computable).

int main() {   crashyCodeGoesHere();}

Dumb Humans Trump Smart Algorithms

Software programs provide considerable efficiencies and offer capabilities that will increase and improve as future iterations are released, and as programmers attempt to mimic the human logic of the experienced business valuation professional.   This attempt, while bold, will likely always lack the power of human subjective thinking.  Software code will crash, it will quickly become obsolete, and will likely never be written by a human who possesses your specific professional judgment.   Oh, and that IRC-409a software vendor (you know, the one whose tool is audit approved – it’s not, btw!): be certain that your engagement does not require the valuation of market-based derivatives, because their algorithm can’t do that!   

Before that SW package crashes in the middle of your engagement, consider these questions:

  1. Who is determining the precise steps in the code? Do you know and trust this coder?
  2. Have you adequately defined the instructions for the coder? What if these instructions change?
  3. Is it possible – or reasonable – to determine every criteria and each circumstance?
  4. Can a program replace your subjective judgement?

FINALLY AND MOST IMPORTANTLY:   Do you possess the experience, judgment and analytical acumen to complete the valuation engagement without the aid of the program – when it crashes? 

 

1. Wikipedia.com.

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