More on discount rates: Escaping the labyrinth - updated. By Hugh Osburn

Not perhaps the esoteric biosector stuff, but the principles in valuations very much so.

I'm on my third SME transaction this year where the other side seems wedded to the ideas of EBITDA and multiples thereof, which in my view, whilst useful rules of thumb, are really proxies for the underlying forward cash flows discounted at an appropriate rate to reflect their inherent risk.

I'm inclined to think there's some serious mispricing going on using the EBITDA multiple route.

And if they are, should they be?

Or have the standard setters gone mad?

Richard Murphy

To answer the comment earlier, any SME who has share option schemes and has to value for FRS20 purposes in the coming year.

I must admit, having waded through these excellent documents, I am still not much wiser about my need for valuing an unquoted company, as one set of valuation options requires me to compare to "others in my sector" and frankly there are few, and the other requires equity traded prices which simply don't exist.

I found the article on valuing share options very interesting, and that on valuing unquoted companies even more so.

My problems, was that the two did not seem to correlate, If valuing options in an unquoted company FRS20 is almost laid down by the standard, the models suggested do not easily lend themselves to a straightforward case of EMI option for all employees in an unquoted company.

The modelling suggested for an unquoted company seems fair and proper, but is not the method agreed for an FRS20 valuation.

Monte Carlo, Black Scholes or binomial do not appear to easily be used on an unquoted company, and yet appear to be the only models acceptable.

I do hope I've missed something, and someone brighter than me will point this out.