Which independent valuation report choose?

An independent valuation report is required in many situations. Before proceeding, it is wise to call upon the services of a Chartered Business Valuator (“CBV”). Many different valuation reports exist, along with their respective fee structure.

The CBV is usually called upon to act as an independent expert to provide an opinion on the value of a business, an asset or an interest in a business or investment. The CBV is involved in many areas of practice, such as:

• Corporate finance;

• Public and private company structure;

• Corporate law;

• Tax law and tax planning;

• Investment analysis;

• Mergers and acquisitions (“M&A”) and divestitures;

• Divorce proceedings;

• Damage quantification and litigation support;

• Business restructuring and strategy;

• Financing, leveraged buy-outs and other types of loans;

• Shareholder’s rights and disputes;

• Financial reporting such as purchase price allocation (“PPA”) and goodwill impairment testing.

• Financial modelling or critic of a financial model; and

• Independent Business valuations.

Before accepting an engagement, the first thing the Chartered Trade Valuator must do is assemble preparatory fundamental data. There are 2 main reasons for this:

1. The client usually wants to receive a quote for the specific service as well as the timeline for the deliverables; and

2. A CBV is bound to the highest standards of the Canadian Institute of Chartered Business Valuators (“CICBV”) and must follow specific guidelines before issuing a valuation report.

Therefore, to do so, the CBV will need to collect some information about:

• The business size and nature of tasks; 

• The reason for the valuation demand; 

• The valuation date; 

• If a particular enthusiasm for the business must be esteemed independently; and 

• The kind of report that should be drafted.

Once this data has been collected and analyzed, the CBV will be able to guide you to choose the right type of report.

When is a formal report required?

The overall guideline is that a business valuation must be issued in written form. This is a professional standard, specifically, the standard 110 of the of the CICBV for business valuation reports, which helps to prevent any misunderstanding along the line.

This implies that calculation schedules alone are not proper.

Consequently, at whenever a conclusion on the value of a business must be given, a conventional report will be required.

However, the requirements of the CICBV do not apply in the case of verbal, commentary or assistance in negotiation.

In that case, professional judgment and experience will guide the CBV to decide whether a written report can be dismissed.

In doing so, the CBV will determine whether the valuation report will be accurate for the matter intended and not deceptive to the reader, as well as the availability of information, as the reason for which the report has to be published.

What a valuation report is and what it is not

As defined in the Standard 110 of the CICBV:

A Valuation Report is defined as “any written communication containing a conclusion as to the value of shares, assets or an interest in a business, prepared by a Valuator acting independently.”

A Valuation Report does exclude work item that is currently being finished that is given to a client or proficient outsider where every one of the following conditions are met: 

1. The work item is obviously set apart as being in draft structure and subject to change; 

2. The work item is given to get remark, guidance, affirmation or other data needed to finish the Valuation Report; 

3. The Valuator knows, or sensibly should know, that the proposed reader(s) doesn't mean to depend on the work item or convey the work item to an outsider who may thus depend on such work item; and 

4. The Valuator has a sensible desire at the time the work item is given that a Valuation Report will be finished and given at the appointed time.

Therefore, a summary does not qualify as a valuation report and is exempt from the standard 110, unless the summary refers to the original valuation report.

Types of valuation reports

There are three types of valuation reports:

1. Calculation Valuation Report

2. Estimate Valuation Report

3. Comprehensive Valuation Report

These 3 reports differentiate from one another based on the scope of review and the amount of disclosure provided, as well as the level of assurance given in the conclusion.

The level of assurance varies, with the calculation report being the lowest form of assurance and the comprehensive report being the highest.

The level of assurance issued will depend on the scope of work and the efforts to analyze, corroborate and review the relevant information.

Calculation Valuation Report

A Calculation Valuation Report contains a conclusion regarding the value of shares, assets or an interest in a business that depends on negligible or based on minimal review analysis, audit and investigation and almost no verification or corroboration of relevant information, data, and for the most part set out in a concise Valuation Report.

Because of the minimal scope of work and review of information, fees associated to this report are the lowest. The conclusion issued will provide the reader the lowest form of assurance.

Generally, the calculation valuation report will be needed in non-litigious situations, where there are not many readers and when there are no significant amounts in play.

• Small to moderate size organizations for tax or succession planning purposes;

• Sell or acquisition of a privately owned business; 

• Shareholder transactions in a privately owned business; ;

• Pursuant to a unanimous shareholder agreement (“USA”); and

• Financial reporting in a privately owned business (goodwill impairment or PPA).

Estimate Valuation Report

An Estimate Valuation Report contains a conclusion with respect to the value of shares, assets or an interest in a business that depends on restricted or limited review analysis, audit, examination and support of applicable data, and by and large set out in a concise Valuation Report.

Because of the limited scope of work and review of information, fees associated to this report are moderate. The conclusion issued will provide the reader an average form of assurance.

Compared to the calculation report, which has minimal to no review of information, the estimate valuation report will review some of the information provided and will try to corroborate it with other sources of data.

Generally, the estimate valuation report will be needed in litigious situations, where there can be multiple readers and when the amounts in play are moderate.

• Moderate size organizations for tax or succession planning purposes;

• Litigation – moderate-size share, business or asset values;

• Litigation – damage quantification;

• Litigation related to matrimonial property disputes;

• Shareholder disputes in a in a privately owned business or pursuant to a USA;

• Expropriation matters; and

• Normal course Financial reporting in a publicly-held business (goodwill impairment or PPA)

Comprehensive Valuation Report

A Comprehensive Valuation Report contains a conclusion as to the value of shares, assets or an interest in a business that depends on an extensive or comprehensive review and analysis of the business, survey and investigation of the business, its industry and all other important components, satisfactorily certified and for the most part set out in a detailed Valuation Report.

Because of the comprehensive nature of the scope of work and review of information, fees associated to this report are high. The conclusion issued will provide the reader the highest form of assurance.

Compared to the calculation and estimate reports, which have minimal and limited review of information, the comprehensive valuation report will review in-depth the information provided and will try to corroborate it with multiple sources of data. This means that several additional sections in the report will be needed such as:

• A full overview of the company being evaluated, including risks, operations, shareholder agreements and other contractual obligations; 

• A description of the financial details used; 

• For publicly traded securities: references to levels of trading and price ranges; 

• Economic context (past and foreseeable future, valuation date conditions); and

• Industry forecast (past and foreseeable future, valuation date conditions).

Generally, the comprehensive valuation report will be needed in litigious situations, where there can be a lot of readers and when the amounts in play are significant.

• Moderate to large size organizations for tax or succession planning purposes;

• Litigation – moderate-size to large share, business or asset values;

• Litigation – damage quantification;

• Litigation related to matrimonial property disputes;

• Expert Witness;

• Fairness opinions;

• Government funding requirements; and

• Financial reporting for a significant transaction in a publicly held business (goodwill impairment or PPA).

The similarities between the 3 reports are summarized in the following table:

A valuation report shall contain at least:

• The premise of the valuation; 

• The methodology and strategies utilized; 

• The basis behind picking the methodology and techniques; 

• Appropriate definitions; 

• Key assumptions utilized; 

• Restrictions influencing the valuator's decision; 

• Restrictions on the utilization of the valuation report; and 

• A conclusion.

What form of report is right for you?

Picking the correct report can be confusing. The initial step is to contact a CBV and detail the particulars of the engagement.

The purpose of the valuation report will be critical to determine what level of assurance will need to be issued. The reason is that the conclusion issued can be used by several users which will rely on this information to make informed decisions. The conclusion needs to have some form of assurance and not confuse the decision-makers. Also, if the information provided in the report will be made public in a contentious nature or matter, the CBV needs to express a conclusion which is not misleading or false.

Conclusion

Business valuation fees are directly correlated with the type of report that will eventually be issued. Because of the complexity of a business valuation, it is important to be thorough in determining the type of report that will be needed.

This will be based on several factors, one of the most important being the purpose of the valuation and its potential users. When conversing with your advisor, make a point to have all the financial related information available.

This is the first thing that the valuator will ask, as a source of preliminary information.

As business owners and entrepreneurs, estimating your business worth is one of the most significant things to comprehend. In case you should need some advice concerning the valuation of your business, contact one of our Chartered Business Valuators.