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The Number That Has to Be Believed
Vivek Muralidharan, Valuation & Financial Advisory - Kreston ME Consulting
Why credibility, not calculation, decides whether a valuation holds.
A deal can survive a hard negotiation, a tight timeline, and an awkward diligence finding. It rarely survives a valuation the other side does not believe.
The model is seldom the problem. The cash-flow forecast runs, comparable deals are referenced, the assumptions are laid out clearly. The trouble starts when a buyer, a lender, or an auditor looks at the conclusion and asks the one question that decides everything: does this number make sense?
The formula produces an output. Whether anyone acts on it is settled somewhere else.
The same profit can hide two very different businesses
Picture two companies. Both report AED 5 million in profit this year. On paper, they look identical.
They are not. Business A won one unusually large project this year. It was real work and real profit, but it is not likely to recur, and the steady part of the business behind it is much smaller. Strip the one-off out and only about AED 1.5 million of that profit is the kind that recurs next year. Business B earned its AED 5 million the ordinary way, through repeat contracts and a spread of customers, so the full amount is likely to recur.
Figure 1: The same headline profit, but only part of it repeats.
This is the difference a valuation has to see through. A buyer does not pay for the profit a business happened to make once. A buyer pays for the profit it can be expected to make again. The headline number is the same; the value is not. What matters is how durable the earnings are, how reliably they turn into cash, and how much risk sits behind them.
The real judgement is in the assumptions
Here is something worth saying plainly: two competent advisors can value the same business correctly and still reach different numbers. That is not a flaw in the method. It is because the judgement lives in the assumptions, not the formula.
Every valuation rests on a view of the future — how fast the business will grow, how much profit it will keep, and how risky that future looks. Change any one of those views slightly and the answer moves. So an assumption cannot rest on hope. It has to be defensible.
If growth is forecast, the valuation should show why it is achievable. If profits are expected to improve, it should show what drives the improvement. If the business is valued above its peers, it should say what earns that. A model can be flawless in its arithmetic and still fail to convince, because the assumptions behind it do not stand up. A valuation is only as strong as the assumptions a reader will accept.
The same business is worth different amounts to different buyers
Value is not a single fixed figure. It depends on who is asking, because different buyers want different things from the same business.
Figure 2: Two buyers, two different values for the same business.
A strategic buyer is a company already in the industry. It is absorbing the business into its own, so it values the synergies it alone can capture: shared costs, cross-selling, a larger market share. Because those gains are real to that specific buyer, a strategic buyer can often justify a higher price. Its question is, what is this worth combined with us?
A financial buyer, such as an investment fund, is buying to grow the business and sell it again in a few years. It values the cash the business generates on its own and the return it can make on exit. It is not paying for synergies. Its question is, what return can we make on this?
Same business, two different values, both entirely legitimate. This is why the purpose of a valuation matters as much as the method. A valuation prepared for a strategic investor is not the same as one for a financial investor, an audit, or a shareholder— even when the model looks identical. Treat every job as the same standard exercise and credibility quietly slips: the figure may be right, yet answer the wrong question for the person relying on it.
Where the advisory work adds value
Most providers can build a model, run the numbers, reference comparable deals, and produce a range. The greater part of the value is the judgement around that output: separating the profit that repeats from the profit that does not, matching the analysis to its purpose, and giving each reader a number they can defend in their own context.
At Kreston, this is where we focus. A number that is calculated correctly is the starting point, not the deliverable. The aim is a valuation that holds up in the room where it matters, whether that is a negotiation, a credit review, an audit discussion, a shareholder decision, or a board meeting.
A strong valuation answers two questions, not one. What is the business worth, and why should that value be believed? The formula answers the first. The second is the work of the advisor, and it is usually the part that matters most.
