Valuation work is a strange beast. Practitioners, and particularly auditors, might like to think that when they take on a business client their work gives them – and possibly everyone else - a pretty good idea what that company is worth. Specialist valuers think otherwise, and their annual fee incomes, at least, would appear to support their argument.

“Quite a lot of valuation gets done by people outside of the profession such as investment analysts or bankers,” says Mark Bezant, chair of the ICAEW’s valuation group. When accountants do tend to get involved, it’s in the valuing of businesses, shares and intangible assets such as brands. Anything more complicated, like financial instruments such as options, is generally the preserve of the city. Anything simpler would probably be the work of a chartered surveyor. But that still leaves plenty of room in the market. So how do most accountants get into valuation?

“These things are often happenstance rather than design,” Bezant says. “You find yourself involved in a couple of transactions, or being asked for some advice, and off of that you build some experience and hopefully get some training. But there are very few of us for whom it’s a full-time job.”

It’s ironic considering that with the ongoing changes in regulation the valuation of investments and other balance sheet (or off balance sheet) assets has been a pre-occupation for many auditors. All the more reason, you’d think, to use that skill and knowledge for a commercial purpose. While they may not be great in numbers – there are probably no more than 150 share valuers in the UK – that could be set to change.

“The main opportunity in valuation is driven by accounting or regulatory requirements, in terms of growth areas,” agrees Bezant, “although there are fewer tax valuations than there used to be as a consequence of exemptions. Very few people do valuations and only valuations all the time. I’m not sure there is that much demand beyond a certain level.”

Typically, valuations occur when the market cannot provide a price. In terms of market value, a business is worth what the market will pay, but the market cannot always be accessed. So valuations tend to occur in a notional context – on the assumption a deal had taken place, what would the price have been? Bezant says it’s rewarding work, and compared to audit, far less repetitive, although it’s not always a smooth ride.

Beware the pitfalls

“One of by bugbears is people having a go when they shouldn’t,” Bezant says. Often, the auditor’s status gives them a natural “in” with the client if any valuation work comes up, possibly through a specific clause in the shareholders’ agreements or articles of association. Before you dig in, make sure you possess the relevant expertise, or that you have access to it.

“Generalists have an expectation that things are quite straightforward,” Bezant complains. “That you just get a profit number then a multiple of that profit number.”

In practice, things can be a lot more complicated. Matters aren’t helped by valuation’s adversarial nature. Poor advice will see you getting sued, and if your valuations are presented at court or in a tribunal, you could get reported to a disciplinary panel. If your valuation forms part of a hotly disputed case, knee-jerk accusations of negligence can be an occupational hazard.

The good news is that support for those engaged in valuations is easier to find than it used to be. The ICAEW’s Valuation Group [1] is a relatively recent creation but it can already count almost 500 members, and they vary from the full-time professional to the curious observer. The Society of Share and Business Valuers [2] (SSBV) is another useful network, although its members often come from backgrounds other than accountancy.

Angela Hennessey of Lane, Clark and Peacock is a SSBV member who has seen the effects of amateur valuation work first hand. IFRS 2 and IFRS 3 have created an entirely new market for valuations, and some of the new entrants are still finding their feet.

“I have seen some absolutely shocking valuations,” she said. “I have seen a self-advertised valuer fail to find a price to earnings ratio, and so use a turnover to earnings ration instead, anything that came to hand, actually. Some of it was quite outlandish. And this was a chartered accountant!”

Hennessey believes there is something of a vicious circle to valuation work. Those who do it infrequently, such as once a year, won’t have seen the full range of valuations and may lack the appropriate experience. Then again, without the appropriate experience, it’s difficult to find more valuation work. What’s worse, inexperience can cost you, particularly in a tax-related valuation, where the absence of a good working knowledge of valuation principles, especially those relating to the somewhat unreal open market envisaged in tax law makes it far less likely HMRC will accept your work.

Then again, negotiating with the taxman may be the next best thing to valuation work in terms of experience.

“That’s how you really learn about it,” she says, “by being tested and having somebody challenge you.”

Attitude goes a long way, it would appear. Valuers have to tread a tightrope between what their client wants – which may often be something quite detached from commercial reality – and what the relevant authorities or the clients’ adversaries think. As well as being an inherently tricky job technically, potential problems can come from either direction.

“You have to be prepared to ask the right questions,” Hennessy summarises. “You can’t be fobbed off.”

In at the deep end

Chris Bailey, an experienced independent valuer who is both a member of the SSBV and the ICAEW’s valuation group, sounds a similar note of caution for those accountants who are considering branching into the field. Independence is paramount, he says.

“It can be rewarding so long as one maintains one’s judgement,” he explains. “There is absolutely no use to anyone in going with the flow of things. A lot of people, if they have a client who believes their business is worth £5 million, will have a look into it and surprise, surprise, they come up with a value of £5 million. That’s not very sensible and usually leads to a lot of trouble.”

Bailey says he’s turned work away because of concerns over his independence, or if he feels his results are likely to displease a prospective client. A valuer must be careful that he abides by the legal requirements for a valuation rather than simply giving the client what he wants, and when Bailey was working for a big city firm this was occasionally a source of friction, but caution must prevail. It is almost a cliché that reputation can take decades to build but hours to destroy, but this is particularly true of valuation.

The second lesson for potential valuers – especially should they be accountants – is not to be too swayed by the numbers.

“Anyone who thinks they can value by multiplying a maintainable profit figure doesn’t really have the first perception of what valuation is all about,” Bailey says. “Anyone who fails to take it on a case by case basis is riding for a fall.”

Of course, however painstakingly researched, valuation will only ever be second to the market in setting the price. Be prepared for some awkward surprises. Bailey relates of how a client, a food supplier, paid handsomely to acquire a rival after the competitor was ruined by a contaminated batch of food. For the life of him, Bailey couldn’t work out why.

“It turned out all he wanted was the customer list, and that list was worth buying the business outright, including the freehold trading property.”

Valuation work can be precarious and frustrating, then, but for its top practitioners are taking home fees in excess of £5,000 a day. Given that access to market for many assets may be temporarily offline due to the downturn, valuation may well be worth thinking about.