Tuesday, June 20, 2017
A company valuation report is a document that is a product of Chartered Business Valuators’ (CBVs) independent and expert review of your company.CBVs can conduct a business valuation and prepare said report either part of a periodic process to ensure streamlined growth objectives; or when there is an immediate need for a valuation, such as a pending transaction, or in the face of legal disputes.
Benefits of Reviewing a Company Valuation Report with a CBV
Many CBVs are retained as independent experts by companies and business owners, and form part of their succession planning team, as a company valuation report is useful in tax and estate planning, as well as setting a benchmark for measuring value enhancement initiatives.
As CBVs prepare the company valuation report, their expert professional opinion also guides business owners and their lawyers while they navigate the purchase or sale of the business, financial reporting, shareholder buyout; and resolving matrimonial, shareholder, or commercial disputes.
Steps in Reviewing a Company Valuation Report
Whether you’re a business owner, or you form part of a legal team that supports a business in transition phases or in a legal dispute, it helps to understand how a CBV prepares a company valuation report in order to crosscheck and verify the information provided in the report and begin the steps to move forward. Here are ten steps to keep in mind when reviewing a company valuation report:
Identify the type of valuation report
The first step involves ensuring the appropriateness of the type of report provided, checked against the purpose for the valuation conducted. This also includes verifying that the author adhered to the Canadian Institute of Chartered Business Valuators (CIBV) professional standards with respect to the scope of work and report disclosure.
Company valuation reports are distinguished by the CBV’s scope of review, amount of disclosure provided, and the level of assurance provided in the conclusion. Three types of company valuation reports can be typically prepared. These include:
- Calculation Valuation Report – based on minimal review and analysis and results in a brief valuation report
- Estimate Valuation Report – which is based on a limited review and results in a less detailed valuation report
- Comprehensive Valuation Report – which is based on a comprehensive review and analysis, and results in a detailed valuation report.
Review the author’s credentials and qualifications
The next step includes reviewing the experience, training and education obtained by the CBV who prepared the valuation report, as well as their professional designations. This also requires determining the professional standards they must adhere to in light of their designations, as well as verifying their experience, such as past expert testimony on business valuation and the outcome.
Identify any scope limitations underlying the conclusions
This step helps ascertain whether or not the CBV conducted sufficient work to support their value conclusion. The extent to which the valuator’s scope of review has been restricted can greatly impact the reliability of their findings presented in the company valuation report.
Identify and assess the valuation approaches adopted
This next part involves looking into the valuation approach adopted and verifying its appropriateness under the circumstances in which the valuation report was required. It also helps to check whether an alternate valuation would have been more suitable, and if so, its impact on the growth of the business or pending transactions. Finally, you should consider whether adopting said alternate valuation approach corroborates or refutes the values determined under a primary approach.
Assess the reasonableness of the projected cash flows and/or historical normalization items
A reasonable and supportable projected cash flow assumption can significantly affect the integrity of the resulting value conclusions stipulated in the company valuation report. Under common income-based valuation approaches, the business valuator must select an operating cash flow level (or range) that they expect the business to generate going forward.
Assess the reasonableness of the capitalization rate, discount rate, or valuation multiplier
When reviewing the company valuation report, it is necessary to check whether the valuation reported is based on a going concern income-based approach, such as a discounted cash flow, or capitalized cash flow approach. You should check to ensure the discount rates or capitalization rates selected are reasonably supported to ensure that the company valuation report provides a supportable and reliable conclusion.
Identify redundant assets owned by the business as of the Valuation Date
Some companies own assets that are not integral to its business operations, nor are required to generate revenue. But even then, these are assets that should be appropriately reflected in a company valuation report. Proper reporting of these redundant assets in the company valuation report is indicated by a separate valuation of said assets, added to the value of business operations.
Ensure income taxes have been properly considered
A proper company valuation report involves ensuring that the value conclusion incorporates the relevant income tax considerations. This is because the value of operating a business depends on its ability to generate discretionary after-tax cash flows. In cases where the value of the business is driven by the underlying value of its assets, such as in real estate holding corporations, essential income tax considerations must also be reviewed, analyzed, and used to form part of the value conclusion report.
Assess the reasonableness of the conclusions, including the implied intangible value
At the end of reviewing a company valuation report, you, as a business owner, or member of the legal team that represents them, should be able to draw a clear path between the reasoning and rationale used in the report, and the findings stipulated it in it. This is a key factor to consider, as business valuations can be somewhat subjective in nature, and the resulting value conclusion can significantly differ depending on the scope of review, depth of inquiries, and experience level of the valuator.
Retain a CBV for an independent perspective
By retaining a CBV, business owners and their legal team will also be able to effectively review a business valuation report, in the process fostering better communication with their CBV. Over time, they gain a better understanding and appreciation for the valuation process. Being able to ask the valuator regarding key underlying assumptions assures owners and their lawyers that the conclusions and recommendations stated in a company valuation report are reasonable and supportable.
Do you own a business going through a transition period, or are you a lawyer set to provide expert legal support to one? Facilitate pending transactions or legal disputes with confidence when your case is backed by professional company valuation report. Contact us at Valuation Support Partners Ltd. 905-305-VSPL (8775) to speak with our experts.
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