Finance

Internal data increasingly vital to business valuation

October 3, 2019
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Financial data analytics has been a hot topic in the field of business valuation for some time now. But as more and more internal data from unlisted companies becomes available, analysis of the relationship between market data and internal data has really taken off. This type of analysis provides business valuation analysts with much clearer insights, ultimately resulting in a more accurate valuation.

Collecting, analyzing, and utilizing data

In recent years, business valuation analysts have been ramping up their efforts to collect, analyze and utilize data from both internal and external sources. External data is gleaned from the public market and is often sourced from data platforms like Capital IQ, while internal data is specific to the company that is being valued.

The rise of internal data

Financial analysts have increasingly begun to prioritize internal data from unlisted companies above external market data when performing business valuations because internal data is of much higher quality. Experts also predict that internal data will take on a larger role in determining required rates of return, which have traditionally been based on market data.

Less unhedged risk

Using data analytics, internal and external data can also be combined to create more accurate analyses. This approach offers a number of major advantages, including the ability to assess whether or not a company’s risk levels are acceptable. Pinpointing risks within an organization allows you to devise financial instruments to mitigate these risks, thereby making the organization more resilient. A company’s vulnerability to monetary fluctuations is an important factor when assessing its value. The increasing use of financial data analytics for business valuation will therefore lead companies to carry less unhedged risk.

New knowledge, skills, and tools

Within the field of business valuation, the astounding growth of financial data analytics means that valuation analysts will not only need to master data analysis techniques, but must also have access to the necessary data sources and tools to perform their analyses. As a business valuation analyst, you’ll increasingly find yourself communicating with management at the companies you’re valuing in order to gain access to internal data. For this reason, it’s important to become skilled at determining which data you need to perform an accurate analysis.

New: insight into future revenue risk

The growing availability of internal data has also led to a new technique: mapping companies’ future revenue risk using a combination of historical internal data, regression models and descriptive statistics. This can be done on a monthly basis, enabling business valuation analysts to include the company’s future revenue risk profile in their analyses.

Greatest challenge to business valuation

When it comes to using financial data analytics for business valuation, the greatest challenge facing analysts is ensuring they don’t take things too far and veer into the realm of econometrics. The data analyses they produce need to be reasonable and manageable in scope; good enough is good enough! A successful analysis is one that leads to a higher-quality business valuation. While data is a necessary part of any valuation, it’s important not to go overboard.

Are you looking to incorporate data analytics into your business valuation work?

Our part-time Master of Business Valuation capitalizes on the rise of internal data and financial data analytics for business valuation with modules on Quantitative Tools and Valuing Private Companies. In addition, you’ll gain hands-on experience in identifying risk factors using a company’s historical financial statements. The program starts on 28 November 2019. Read more about the program or get in touch with our Program Adviser Sandy Keulemans at s.keulemans@tias.edu or +31 13 466 39 56.

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