Tuesday, March 26, 2013

10 Steps to Reviewing a Business Valuation 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 to provide a business valuation report in situations where there is an immediate need for a valuation.  This could be in the context of an actual transaction (e.g. purchase or sale of a business, financial reporting, shareholder buyout, etc.) or in the context of a legal dispute (e.g. matrimonial, shareholder or commercial dispute).  Business valuators are also a valuable member of a business owner’s succession planning team since a valuation report is useful for tax and estate planning as well as for providing a benchmark for value enhancement initiatives.
Business owners and lawyers would benefit from being able to effectively review a business valuation report.  Doing so allows for better communication with the valuator through having a better appreciation for the valuation process.  In addition, being able to question the business valuator regarding key underlying assumptions can provide a business owner or lawyer with more comfort that the valuation conclusions are reasonable and supportable.
A survey discussed in CA Magazine showed that 91% of litigators that had retained experts retained them to review opposing expert reports (likely including business valuation reports). [1]  When served with a business valuation report, it is beneficial for litigators (and their clients) to have an effective process for reviewing that business valuation report in an efficient manner.  This helps to identify when it is appropriate to involve an independent valuation expert and enables effective communication with the expert in order to manage costs for the client.
The 10 step process for reviewing a valuation report containing a conclusion as to the value of an equity interest in a business (i.e. a controlling interest or minority interest) is summarized below:




Identify the type of valuation report. 


Review the author’s credentials and qualifications.


Identify any scope limitations underlying the conclusions.


Identify and assess the valuation approach(es) adopted.


Assess the reasonableness of the projected cash flows and/or historical normalization items.


Assess the reasonableness of the capitalization rate, discount rate or valuation multiplier.


Identify any redundant assets owned by the business as at the Valuation Date.


Ensure income taxes have been properly considered.


Assess the reasonableness of the conclusions, including the implied intangible value.


Retain a CBV for an independent perspective.

This is the general approach I take in reviewing and critiquing another business valuation report.  Follow me over the coming weeks as I explore each of the above noted steps in more detail.
If you require an independent business valuation or recognize the importance of having professional valuation advice for your exit planning, contact us at www.vspltd.ca.

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