Hope all is doing well. A very well-respected valuator asked me if I knew of Dr. Damodaran’s Complexity Score discount model. I responded with an affirmative no but it definitely piqued my interest. After researching via “Dr. Google”, I did find a whole slew of great information on this Complexity Score. As a matter or fact, Dr. Damodaran actually built an Excel Spreadsheet for users to determine the discount that should be applied to the valuation. In his academic paper supporting the Model (“The Value of Transparency and the Cost of Complexity”- Aswath Damodaran- January 2006), he first delineated what complexity means. In a more than likely “tongue and cheek” manner , he said the definition is “complicated”. Overall, a complex company would have three elements: a) regulatory issues, b) accounting issues, and c) corporate structural issues. Based on these three elements, he developed a litany of questions the valuator needs to consider and then a subsequent score would be inputted based on the model. Afterwards, an overall score is obtained where the discount for complexity percentage should be applied. Has it been used much? Probably not but it is something one should consider when valuing “complex” firms.
Until next time…………….