Tuesday, October 30, 2012

10 Steps to Critiquing an Expert Report

Chartered Business Valuators (CBVs) support the business and legal communities in matters which include, but are not necessarily limited to, business valuation, value enhancement, exit planning and litigation support.

CBVs are frequently retained as independent experts in legal proceedings (e.g. commercial disputes, shareholder disputes, matrimonial disputes, etc.) to assist with a business valuation or an economic damages assessment.  This assistance can include the preparation of an independent expert report or the review of an opposing expert’s report.

Civil proceedings in the Superior Court are generally governed by the Rules of Civil Procedure.  The duty of an expert is discussed at Section 4.1 of the Rules of Civil Procedure, which stipulates that:
"It is the duty of every expert engaged by or on behalf of a party to provide evidence in relation to a proceeding under these rules,
  1. To provide opinion evidence that is fair, objective and non-partisan;
  2. To provide opinion evidence that is related only to matters that are within the expert’s area of expertise; and
  3. To provide such additional assistance as the court may reasonably require to determine a matter in issue."
It is quite clear that an expert’s role is to assist the court in an independent and objective fashion.  It is extremely important for both experts and litigators to be cognizant of this throughout the litigation process.

According to a March 2010 survey discussed in CA Magazine, 91% of litigators that had retained business valuators retained them to review opposing expert reports. [1]  When served with an expert report, it is beneficial for litigators (and their clients) to have an effective process for reviewing that expert report in an efficient manner.  This will help determine when it is appropriate to involve an expert and enable effective communication with the expert in order to manage costs for the client.

Here is a 10 step process for reviewing an expert report which quantifies economic damages in commercial disputes (e.g. breach of contract, breach of fiduciary duty, securities litigation, patent infringement, etc.):




Review the author’s credentials and qualifications.


Identify any scope limitations and qualifications on the conclusions.


Identify and assess the assumptions underlying the conclusions.


Ensure the conclusions represent the expert’s opinion and not simply calculations.


Identify and assess the damages approach adopted by the expert.


Identify and assess the damages period assumed in the report.


Identify future damages and ensure they have been appropriately discounted.


Ensure the contract was considered by the expert.


Ensure that mitigation was considered and addressed by the expert.


Retain a CBV for an independent perspective and to prepare a responding report.

This is the approach I take in reviewing and critiquing another expert’s report on damages.  Follow me over the coming weeks as I explore each of the above noted steps in more detail.
[1] Source: http://www.camagazine.com/expertwitnesses/default.aspx

Tuesday, October 23, 2012

Key Value Drivers - Finding Your Blue Ocean

Having a competitive advantage or industry niche is a key value driver for many businesses.  A potential purchaser will be very interested in a business that has a unique and meaningful product/service offering or one that has reduced or eliminated competition in the marketplace.

This value driver reminds me of a book entitled "Blue Ocean Strategy", by W. Chan Kim and Renee Mauborgne, in which red oceans represent all the industries in existence today (the known market space) and blue oceans denote all the industries not in existence today (the unknown market space).
"In red oceans, companies try to outperform their rivals to grab a greater share of existing demand.  As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody."
"Blue oceans, in contrast are defined by untapped market space, demand creation, and the opportunity for highly profitable growth.  In blue oceans, competition is irrelevant because the rules of the game are waiting to be set."
I would recommend this book to any business owner looking to enhance the value of his/her business.  According to Kim and Mauborgne, "the only way to beat the competition is to stop trying to beat the competition."

This is a paradigm shift for many business owners.  In Blue Ocean Strategy, specific industry examples (e.g. automobile, computer, entertainment, cosmetics, etc.) are used to illustrate how to formulate and execute a blue ocean strategy – how to find that untapped market where there is no competition.

Finding a blue ocean will drive significant value for a business.  Having a unique and meaningful product/service offering increases value for two reasons:

  1. Increases a company’s cash flows (e.g. through premium pricing, increased sales volumes or decreased costs such as marketing expenses); and
  3. Decreases a company’s risk profile (e.g. through securing customer relationships, developing a brand or having no direct competition).
This strategy has been effectively implemented by many companies operating in saturated, mature or declining industries to reinvent themselves and create significant value.  Many examples are discussed in Blue Ocean Strategy including, but not limited to, Cirque du Soleil, Honda, IBM, Apple, Swatch, Body Shop, Home Depot and AMC.

A blue ocean strategy is a dynamic process.  Once a new market becomes known, imitators will appear on the horizon looking to turn the blue ocean red.  There are, however, advantages to being the one to create a blue ocean, including certain barriers to imitation.  These barriers, which can include patents or legal permits, are discussed in Blue Ocean Strategy.

Finding a blue ocean is one of many drivers of value for a business.  Visit us online to learn more about our value enhancement process and how we can help you increase the value of your business:

Tuesday, October 16, 2012

Do You Think Like a Potential Purchaser?

While some business owners think they know what their business is worth, others have no clue.  Do you really know what a potential purchaser would be willing to pay for your business?
According to RBC Business Succession Planning, Your Essential Road Map:
"It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."

Value is in the eye of the beholder and value is different under different value definitions.  Fair market value (FMV) is a great starting point as it takes the perspective of a potential purchaser and is a very common value definition applicable in many situations.
Getting your business professionally valued can help you think like a potential purchaser.  Here are 5 other advantages to having a professional valuation done for your business:

1.  Enhance Business Value:  a business valuation provides a benchmark from which to measure value enhancement as well as helping to identify the key value drivers.  Documenting the increase in value over time will increase the business’ attractiveness, which will help maximize the price a purchaser will be willing to pay for the business.

2.  Manage Family Wealth:  privately held businesses often represent a significant percentage of a family’s wealth.  Business owners simply cannot manage and protect their family’s wealth without knowing the value of their family assets (including the business).  A professional valuation also prepares the family in the event that they receive an unsolicited offer.

3.  Prevent Costly Legal Disputes:  periodic business valuations allow the shareholders to discuss and agree on the current value of the business before any potential disagreements arise.  The valuations are also helpful in the event of a marital dispute because the valuation issue will have already been dealt with.

4.  Tax and Estate Planning:  a valuation provides support for the value transferred and acts as insurance for potential disputes with the CRA (estate freezes, reorganizations, related party transactions, etc.).  Price adjustment clauses may be disregard by CRA if it determines that a reasonable attempt at value was not conducted at the time of the transfer.

5.  Shareholder Life Insurance:  a valuation provides business owners with third party evidence for ensuring that adequate life insurance is in place (e.g. key person or buy/sell agreements).  This in turn provides the shareholders with peace of mind and comfort that their families and/or businesses are sufficiently protected.
You may not be ready to sell your business at the present time, but it is never too early to start thinking like a potential purchaser.  Find out how a potential purchaser would view your business today by taking the short "Sellability Score Questionnaire" at:

Thursday, October 11, 2012

Exit Planning - A Business Needs Curb Appeal

You never get a second chance to make a first impression.
Let’s say you’re in the market for buying a house and you go to see one that sounds like it may have potential.  How does it look on the outside?  The inside?  What about the location?  What is your general impression?
Like your house, your business projects an image to potential buyers.  When potential buyers come to see your business for the first time, your "curb appeal" can either attract them to your business or cause them to walk away from it.
Do you need to improve your business’ curb appeal?  Here are some suggestions:
1.  Fix Your Leaky Faucets
Perhaps you started your business from scratch with one or two employees and now you have over 20 employees.  Do you have the appropriate infrastructure in place for that size company?  You may take pride in your informal management style, but this can prove to be a liability when it comes time to sell.
Make sure appropriate HR policies are in place and at least as stringent as those of the company you hope will buy your business.  Some basics to have in place include: 
  • A written policy making it clear you forbid any form of harassment or discrimination;
  • A written employment contract for each staff member;
  • A written description of your bonus system; and
  • Written policies for employee expenses, travel and benefits.
2.  Assemble Your Binder
When you buy a house, it will give you confidence if the owner has the instruction manuals for the appliances, information on where they were purchased, and who to call if one of them breaks down.  Similarly, when a potential buyer looks at your company, he/she wants to see that you have your business information in order.  Documenting your office procedures, core processes, and other intellectual capital can help you attract more bidders and a higher price for your company. 
If you want to attract a buyer one day, your business needs a binder with instructions for basic functions, such as:  
  • Opening and closing procedures;
  • Forms and step-by-step instructions for routine tasks;
  • Templates for key documents;
  • Emergency numbers for service providers;
  • Billing procedures for customers; and
  • How your company is positioned in the market and your marketing tools.
3.  Document Your Intangible Assets
Intangibles for house buying might include: Is the house near a good school or daycare?  What kind of neighbourhood is it?   What kind of commute will you have to get to work?
Your business also has intangible assets, often intellectual, that a potential buyer needs to be made aware of, such as: 
  • A formula for acquiring and retaining quality customers;
  • Proprietary research you’ve conducted or processes you’ve developed;
  • Criteria you use to evaluate a potential new product, service or location; and
  • Your unique approach to satisfying your customers' needs.
As with selling a house, your company's curb appeal can go a long way towards attracting buyers, increasing the price and, ultimately, closing a deal. 

Friday, October 05, 2012

Key Value Drivers - Size and Scalability

Size and scalability is a key value driver for most businesses.  Larger businesses are perceived to be more substantial and stable organizations than smaller companies.  These businesses have found a way to grow beyond the efforts of the owner(s) and become less reliant on the owner. 
Investors consider smaller companies to be riskier than larger organizations.  From a valuation perspective this additional risk is reflected in the capitalization rate (i.e. inverse of the multiple) as a size premium.  A size premium increases the capitalization rate which equates to a lower valuation multiple and, therefore, lower value.
According to Ibbotson SBBI, the size premium represents the additional risk inherent in small public company stocks as compared to larger public company stocks.  For example, the risk premium associated with micro-cap stocks (where the largest micro-cap company had a market capitalization of $1.2 million) is approximately 4%. 
A company with a scalable business model will be more valuable.  Growth and scalability, however, is a challenge for many small businesses.  Is there sufficient demand for your products/services to support growth?  Do you have the resources to support the increased demand?  Do you have the input supplies required to support the increased demand?  Do you have the management team in place to manage the increased resources required to meet the increased demand?  Does your business have the infrastructure necessary to scale its operations? 
What would have to change in your company for it to handle 5 times the current number of customers?
Business owners looking to build a business to sell one day should consider the company’s scalability potential.  Some of the options to consider include:
  1. Geographic Scalability - Will your business model work in another city?
  3. Cultural Scalability – Will your business concept work in another culture?
  5. Horizontal Scalability – Can you leverage a brand by selling new products/services to your existing customers?
  7. Vertical Scalability – Does your business have the infrastructure in place to provide existing products/services to new customers without increasing the variable costs?
Although there is a market for main street businesses, larger companies are perceived as less risky and therefore more saleable.  Demonstrating a business’ scalability is one of the keys to driving a premium price for the company when it comes time to sell.
If you are building a business to sell one day and are curious to see how your business ranks on the key value drivers considered by potential purchasers, take the 13 minute Sellability Score questionnaire: