The complexity in the Valuation Process of Companies

The valuation process of companies is associated with significant complexities that result from various factors:

1. Regulatory Requirements and Auditing

1.1 Independence of the Valuation Process:

The AIFM regulation requires that the valuation process be independent from the investment process. The valuation team must not be involved in investment decisions or represented on the boards of portfolio companies.

1.2 Documentation Obligations:

All information needed for the valuation must be present in written form and properly documented to be classified as "evident" by the auditor. This creates a high administrative workload, especially for larger funds with extensive portfolios.

2. Different Valuation Methods Depending on Development Stage

2.1 Early-Stage Companies (VC, Pre-Seed to Series A):

Here, the valuation of the last financing round (“LFR”) is often used. Complexity arises from the distinction between voting shares and fully diluted ownership (“FDO”). Calculations must consider factors such as ESOPs-Contracts, CLAs, venture debt, and further dilutions like liquidation preferences.

2.2 Growth Companies (PE):

Methods like EBITDA multiples or discounted cash flow models are used. Selecting and applying the correct method requires expertise and can be complex. The more mature the investment, the more one also refers to valuations of comparable companies in the public market.

3. Impairment Tests and Write-downs

There is no uniform approach for write-downs when subsequent financing rounds fail to materialize. Larger funds often have clear guidelines for such cases, but implementation requires detailed analyses and decisions.

4. Exit Scenarios and Liquidation Preferences

Liquidation preferences, interest rates, and other complex contractual mechanisms influence the actual exit proceeds.

5. Interim Conclusion

The complexity in the valuation process of companies arises from a combination of regulatory requirements, the necessity of comprehensive and audit-proof documentation, varying valuation methods depending on the company's development stage, managing large amounts of data, and considering complex contractual structures during exits. Additionally, there are challenges in aligning the differing expectations of investors and auditors, as well as the high resource expenditure for personnel and external services.

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How TALIC Provides Relief

TALIC offers a comprehensive solution to tackle these diverse challenges in the valuation process and make the entire procedure more efficient and transparent.

7. Efficient aggregation of all relevant information, documents, KPIs, and changes in circumstances

All documents and information exchanged between portfolio companies and funds over the term are automatically captured by TALIC. This significantly reduces time expenditure and eliminates information silos and ensures data consistency for an accurate company valuation.

8. Audit-Proof Documentation of Documents

TALIC ensures audit-proof documentation of all documents and changed circumstances, thereby reducing administrative effort and ensuring compliance.

9. AI-Supported Public Market Research

To account for public events that could impact valuations, TALIC assists funds in researching market information and current news in the relevant sector. For instance, market multiples can be extracted from public data, enhancing the quality of valuation models and better aligning the expectations of investors and auditors.

10. Automated Report Generation

TALIC's report generator enables the automatic creation of reports that meet regulatory requirements. This not only saves time and resources but also improves the accuracy and consistency of reporting.

11. Input Assistance for the Valuation Process

Through guided steps and assistance, TALIC ensures that the correct valuation methods are applied and all relevant factors are considered.

12. Predefined Workflows and Proactive Reminders

TALIC enables users to build predefined workflows in the valuation process. For instance, the manager receives an automatic notification if there has been no new valuation after 6–12 months and is guided through a predefined impairment-test process. This increases efficiency and minimizes the risk of errors.

Conclusion

TALIC provides audit-proof, up-to-date storage of all relevant information and supports the valuation team through comprehensive market research, ensuring adherence to the fund’s predefined compliance guidelines.