Thursday, July 26, 2012

Verbal Valuations For Planning Purposes

"Knowing the value of your business is just good business. It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."  [1]
There is often an immediate need to retain an independent expert Chartered Business Valuator (CBV) to prepare a business valuation report.  Previously, I have discussed the different situations CBVs are retained to prepare an independent business valuation report.

Valuation reports prepared by a CBV must adhere to the professional standards of the Canadian Institute of Chartered Business Valuators (CICBV).  For example, CICBV Practice Standard 110 – Report Disclosure Standards and Recommendations sets out the report disclosure requirements for the three different types of valuation reports (i.e. Calculation, Estimate and Comprehensive).  For further reference please visit

Standard 110 defines a valuation report 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 written communication includes a report, schedules, letter or email.

According to Standard 110 "the valuation report shall provide sufficient information to allow the reader to understand how the valuator arrived at the conclusion expressed."  As a result, the valuation report (depending on the type of report) may contain the following sections: i) Introduction; ii) Definitions; iii) Scope of Review; iv) Company Background; v) Industry and Economic Discussion; vi) Valuation Approaches; vii) Description of the Valuation Calculations; viii) Key Assumptions; ix) Restrictions; and x) Conclusions. To prepare a written valuation report, additional time is spent by the valuator ensuring these report disclosure standards are met.

In certain situations a business owner may not require a written report.  A verbal communication of value may be sufficient where an indication of value is required for planning purposes.  Examples include: i) benchmarking for wealth management or value enhancement; ii) planning the eventual sale of the business (internal or external); (iii) preliminary assessment of a potential target business to acquire; and iv) insurance coverage purposes (e.g. key person, buy-sell, etc.).

The scope of work, analysis and conclusions will be the same under both the verbal communication and the written report.  Under a verbal communication, however, no valuation report is prepared. The benefits to a business owner of receiving a verbal communication include:

  1. Still getting the expertise of a professional valuator;

  2. Not as expensive as no valuation report is prepared; and

  3. Can choose to have a valuation report at a later date.
The downside to receiving a verbal communication is that there will be no take-away for the business owner as the valuator is precluded from distributing any materials whatsoever, including the valuation schedules.

Verbal valuations, however, can be very useful in planning situations where the business owner wants the expertise of a professional valuator but does not require a written report and does not want to incur the cost of having the valuator prepare a written report.

1.  Source: RBC Business Succession Planning: Your Essential Road Map.

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