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How to Identify Gaps in a Business Valuation Report

How to Identify Gaps in a Business Valuation Report

The quality of a business valuation report is largely driven by the underlying assumptions made by the valuator – how reasonable or unreasonable those assumptions are will reflect the quality of the report.  The valuator’s experience and professional judgment will affect his/her ability to make reasonable and supportable assumptions which directly affects the quality of the valuation conclusions.

Not All Business Valuations Are Created Equal

If you require a business valuation – whether for a transaction in a high-volume business district like Toronto, an internal and external transfer, or for litigation purposes – remember that not all valuation reports are created equal.  Although in theory, two different valuators should arrive at comparable results, differences in value conclusions for the same business at the same date are not uncommon.  Unreasonable assumptions, errors and omissions will lead to an erroneous value conclusion, which can lead to dispute among shareholders, challenges by CRA, breakdown in negotiations with a potential buyer or a prolonged or a litigious and costly matrimonial separation.  

Those retaining a business valuator or relying on a business valuation report, such as business owners, management, accountants, lawyers, and other trusted advisors, must be aware of the most common errors and omissions found in a poor valuation report.  

The 12 Most Common Errors and Omissions in Company Valuation Reports

According to “A Reviewer’s Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal”, the 12 most common errors and omissions found in tax court appraisals include:

  • Failure to comply with applicable professional standards – is the author of the report a Chartered Business Valuator (CBV)?  If so, he/she must follow the professional standards (scope of work, report disclosure and file documentation) of the CICBV in Canada  
  • Overstatement or inadequate listing of valuation credentials – did the author of the report provide a CV or professional resume?  Are the credentials appropriate and can they be verified or substantiated?
  • Too much involvement by the lawyer or client – was the valuator truly independent or did he/she rely too much on what they were told by the lawyer or client?
  • Misapplication of the standard of value – what standard of value was used by the valuator (e.g. fair market value, fair value, value to owner, etc.) and was it appropriate?  
  • Misapplication of the valuation date – did the author of the report inappropriately rely on post valuation date or hindsight information?
  • Failure to identify the correct business interest to value – did the author of the report value the correct business interest or shareholding?  
  • Incomplete or incorrect sources of data – can the sources referred to in the report be verified?  Without the proper research sources, the valuation can be faulty and unreliable.
  • Failure to conduct a site visit and management interviews – did the valuator tour the company premises and interview management?  If not, key information may have been missed or neglected.
  • Failure to create a replicable analysis – can the author’s analysis be replicated and does it stand up to cross examination?  
  • Inadequate support for valuation conclusions – are the assumptions reasonable and supported with independent evidence?  Were alternate, secondary valuation approaches used as a reasonable check on the conclusions?

Retain a Chartered Business Valuator

Reviewing a business valuation report in Toronto, Ontario, Canada can be challenging.  When you retain a CBV, you will have an opportunity to review the report in draft form before it is finalized.  Make sure to consider these potential errors and omissions when reviewing the draft report and question the valuator where you suspect an error has been made before the report is finalized.   

Avoid dispute with your shareholders, challenges by CRA, breakdown in negotiations with a potential buyer and/or a prolonged, litigious and costly matrimonial separation by reaching out to our CBVs in Toronto and the GTA today for independent valuation support.