This is a common misconception and one that could not be further from the truth.
But First, What is Business Valuation?
Business valuation is not merely a popular concept in corporate finance but has gained significant real-world traction among business owners. An independent business valuation helps the owner understand the fair market value of the company and should be conducted for many different reasons. Valuation support in the GTA must consider a myriad of factors – from assessing the balance sheet to studying how market trends and other factors affect the ability of the business to generate future income and/or cash flows.
Why is an Independent Valuator Needed?
Business owners should not conduct the valuation themselves as they are biased and likely to overstate the value of their business. This creates a point of conflict for investors, partners, tax assessors, shareholders and successors as to its actual worth. An independent and professional valuator negates this likelihood altogether. They will arrive at an objective, reasonable and supportable estimate of value after evaluating all relevant aspects of the business.
What is a Valuation Report?
According to the Canadian Institute of Chartered Business Valuators (CICBV), a business valuation report is “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.”
The CICBV lists three categories of valuation reports:
- Calculation Report
This is a concise valuation report that contains a conclusion of value that is based on a very limited review of key documents and discussions with management. When is such a report warranted? Calculation reports are well suited for succession, exit, estate and tax planning purposes or internal planning and value enhancement initiatives. They may also be useful for preliminary assessments and negotiations in a shareholder buyout or matrimonial separation.
- Estimate Report
This report is more detailed than a Calculation report and is based on a limited review of key documents with some independent research and corroboration of key assumptions. The Estimate report is more suitable for higher risk situations where the report will be relied upon for an actual transaction or shareholder/matrimonial dispute.
- Comprehensive Report
As the name suggests, the Comprehensive report is based on a detailed review of key documents and significant independent research and corroboration of underlying assumptions. The report will be more fulsome and detailed than a Calculation or Estimate report.
A Comprehensive report is suited for higher risk assignments which will be relied upon by public investors in an actual transaction (e.g. fairness opinions) or where large dollars are at stake in a shareholder/matrimonial dispute in which the valuation expert will be required to testify as an expert witness in court.
No Two Valuation Reports Are the Same
Just as no two businesses are alike, no two valuations are alike either. This is largely due to the fact that, depending on the business, the industry and the valuator themselves, the tools and methods used to conduct the valuation are likely to vary.
The outcome of a business valuation report rests on the reasonableness of various underlying assumptions made by the valuator. Thus, the soundness and accuracy of the overall report will rely heavily on the judgment used in making and supporting these underlying assumptions.
Differences in judgment can drastically sway the valuation conclusion. It shouldn’t be surprising if there is a major difference in two valuation reports conducted by two separate valuators, even if both these reports are valuing the same business at the same date. Additionally, valuators might unknowingly commit certain errors or omit relevant data in their report, contributing to further discrepancies.
In view of that fact, it is always best for those relying on the valuation report to familiarize themselves with the more common errors and omissions made by valuators. A Reviewer’s Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal details these 12 common errors and omissions:
- Failure to comply with applicable professional standards (e.g. the CICBV in Canada);
- Overstatement of valuation credentials (or inadequate listing of credentials);
- Too much input made by the attorney/legal counsel;
- Misapplication of the standard of value;
- Misapplication of the valuation date (most commonly, the inclusion of hindsight);
- Failure to identify the correct business interest to value;
- Bias and/or lack of independence;
- Incomplete or incorrect sources of data;
- Pure reliance on case law;
- Failure to make a site visit or conduct management interviews;
- Failure to create a replicable analysis; and
- Inadequate explanation or support for the valuation analysis and conclusions.
Get a Professional Valuation Report Today!
Hiring a professional and independent valuator ahead of time is a great way to access several benefits that would ordinarily be closed off to you. Call us at 905-305-VSPL (8775) to get started!