The Significance Of Valuation Report For A Business
This is a common misconception and one that could not be further from the truth, given that no business comes with one-size-fits-all requirements. But first, what is business valuation?
Business valuation is not merely a popular concept in corporate finance but has gained significant real-world traction - and quite rightly so! It helps the business owner arrive at the fair value of their company, and is usually conducted prior to the sale of all or part of the operations or during a merger or acquisition. Valuation support in the GTA examines a myriad of factors - right from assessing the balance sheet to studying market trends, making informed predictions as to how those influence the state of the economy and, in turn, the ability of the business to generate future cash flows.
Why is an independent valuator needed?
It is advisable that business owners not carry out the valuation themselves as they occupy a biased view of their own assets and, naturally, are inclined to attach a higher value to their business. This creates a point of conflict for investors, partners, tax assessors, shareholders and successors as to its actual worth. An independent and professional valuator negates this likelihood altogether. They will arrive an an objective estimate after evaluating all relevant aspects of the business such as its capital structure, management team, current market value and future earnings prospects.
What is a valuation report?
According to the Canadian Institute of Chartered Business Valuators (CICBV), a business valuation report is “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. ”
The CICBV lists categories of valuation reports:
- Calculation Report
This is a brief valuation report that is founded on a very basic scrutiny, review and verification of relevant data. It includes a conclusion of the value of assets, shares and the interest in a company. When is such a report warranted? Usually Calculation reports are well suited to SMEs for succession, estate and tax planning endeavours. It also serves its purpose in the case of family law when there is no outside arbitration required to resolve a dispute.
- Estimate Report
This is a little more detailed as compared to its predecessor and is founded on limited scrutiny, review and verification of relevant data. It includes a conclusion of the value of assets, shares and the interest in the company. For this type of report, the valuator needs to have a reasonable understanding of the business, the industry, the former, current and future financial postures and those economic cycles that sway business conditions. When creating an Estimate report, the valuator is likely to examine all the data provided, appraise the company’s capital assets, analyse economic publications and deliberate with the management and other such subject matter experts. An Estimate valuation is suited to mid-range businesses and works well for estate, succession and tax planning purposes, purchase/sale of a minority to a majority shareholder, litigation and for family law matters that do not require outside mediation.
- Comprehensive Report
As the name suggests, it is a definitive report that is founded on scrutiny and review of the company, the industry and all relevant data. This information is verified in as detailed a report as possible and includes a conclusion of the share values, assets and the interest in the company. In addition to possessing all the knowledge detailed in the Estimate report, the valuator may also study real estate appraisals, solicit opinions on management compensation and talk to outside experts regarding market trends. A Comprehensive report is suited to large companies and works well for succession and tax planning purposes, purchase/sale of a minority to a majority shareholder, litigation and for family law matters that do not require court proceedings or outside arbitration.
Just as no two businesses are alike, no two valuations are alike either. This is largely owing to the fact that, depending on the business, the industry and the valuator themself, the tools/methods used to conduct the valuation are likely to vary. The outcome of a business valuation report rests on the soundless of certain underlying assumptions made by the valuator. Thus, the soundness and accuracy of the overall report will rely heavily on the judgment used in supporting these underlying assumptions. Differences in judgment can drastically sway the valuation conclusion. It isn’t surprising if there is found to be a major difference in two valuation reports conducted by two separate valuators, even if both these reports are based on the same business as on the same date. Additionally, valuators might unknowingly commit certain errors or omit relevant data in their report. In view of that fact, it is always best for those relying on the valuation report to familiarize themselves with the more common errors and omissions.
