Not All Valuation Reports Are Created Equal

The quality of a business valuation report depends upon the reasonableness of the underlying assumptions made by the valuator.  The valuator’s judgment (or lack thereof) in assessing and supporting the reasonableness of the underlying assumptions can have a significant impact on the reasonableness of the overall valuation conclusions. 

Differences in judgment among valuators will often result in different value conclusions for the same business entity as at the same valuation date.  In addition, various errors and omissions in a valuation report can lead to an erroneous value conclusion.  It is important for those relying on a business valuation report (e.g. business owners, management, accountants, lawyers and other professional advisors) to be aware of some of the more common errors and omissions made by valuators. 

According to "A Reviewer's Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal" [1], the 12 most common errors and omissions found in tax court appraisals include:

1. Failure to comply with applicable professional standards (e.g. the CICBV in Canada);
2. Overstatement of valuation credentials (or inadequate listing of credentials);
3. Too much involvement by the attorney;
4. Misapplication of the standard of value;
5. Misapplication of the valuation date (most commonly, the inclusion of hindsight);
6. Failure to identify the correct business interest to value;
7. Bias and/or lack of independence;
8. Incomplete or incorrect sources of data;
9. Pure reliance on case law;
10. Failure to make a site visit or conduct management interviews;
11. Failure to create a replicable analysis; and
12. Inadequate explanation or support for the valuation analysis and conclusions.

Ironically, business appraisals can also suffer from too much information and analysis. According to Hood and Lee:

"The court’s first objection to appraisals is an overarching concern that there are diminishing returns in extensive numerical analyses in the appraisal process and that, no matter how the appraisal is fashioned, it has many areas for subjective determination along the way, which culminates in a subjective opinion."

Although the above noted errors and omissions are based on a review of tax court rulings in the United States, they are very likely equally applicable to valuation reports prepared in Canada.

When you retain a CBV, you will likely 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.

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[1]    Published by Wiley, authored by L. Paul Hood Jr. and Timothy R. Lee  
           http://ca.wiley.com/WileyCDA/WileyTitle/productCd-0470603402.html