Wednesday, April 17, 2013

Step 3 to Reviewing a Business Valuation Report – Scope Limitations

How reliable is a valuation that was rendered based on a restricted or limited scope of review?  Is the quality of a valuation report affected by the extent to which the valuator was restricted from examining certain key documents and/or interviewing key parties?
The third step to reviewing a business valuation report involves identifying any major scope limitations, restrictions and qualifications rendered on the value conclusions.  This helps ascertain whether or not the valuator conducted sufficient work to support the value conclusion.  The extent to which the valuator’s scope of review has been restricted can seriously impact the reliability of the valuation findings.
A business valuation report should explicitly identify any limitations in the valuator’s scope of review.  In Canada, Chartered Business Valuators (CBVs) must follow the Practice Standards of the CICBV for Valuation Reports. In this regard, Practice Standard 110 states,

"The Valuation Report shall contain a scope of review that clearly identifies the specific information on which the Valuator relied to arrive at a conclusion.  Where the conclusion is qualified by a scope limitation, regardless of the type of Valuation Report being provided, the limitation shall be explained, setting out the reasons for the limitation."   [1]

Potential scope limitations to consider when reviewing a valuation report include:
  • Not having access to relevant information or key documentation;   
  • Not being permitted to interview key individuals;
  • Not conducting a site visit or a tour of the company’s operating facilities;
  • Not relying upon other specialists outside the valuator’s area of expertise (e.g. real estate appraiser, machinery and equipment appraiser, etc.); and
  • Not having reliable financial information (e.g. financial statements prepared internally by management and not audited or reviewed by an external accountant).
Where do you find scope limitations in a valuation report?

Scope limitations should be separately identified in the valuation report and may be set out in one of the following sections of the report:
  • Scope of Review & Limitations
  • Restrictions & Qualifications
  • Conclusion (e.g. immediately preceding or after the conclusions)
  • Methodology or Valuation Approach
Limitations in the scope of a valuator’s review can negatively impact the quality and reliability of the value conclusions.  Scope limitations are generally easy to spot as there is typically a section in the valuation report designated for their identification.  Occasionally, scope limitations may not be explicitly highlighted in the report.  They may be alluded to where the calculations are being explained or in the notes to the schedules where the valuation calculations themselves are contained.  It is, therefore, worthwhile to scrutinize the report for any indication that the valuator was limited in his/her scope of review and question what impact that limitation may have had on the valuation conclusions contained therein.
If you have any questions regarding matters involving the valuation of your business or if you would like an independent business valuator to assist in your review of a business valuation report, contact us at

1.  CICBV Practice Standard No. 110 – Report Disclosure Standards and Recommendations (Section 12).

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