You may already think of Chartered Business Valuators (CBV) as the report writers and guideline income calculators, but we are also able to provide assistance in other capacities. As you may be aware, there are different types of formal valuation reports that a CBV is able to provide, but it is not always clear which report (if any) is required.
Three Types of Business Valuation Reports
A Valuation Report is a formal document where a Chartered Business Valuator provides a value conclusion on shares, assets or interest in a business.
There are three main types of business valuation reports that can be issued, which are distinguished by the level of assurance provided, and also the extent of the corroboration, review and analysis performed. One type may be more suitable than the other for a given situation depending on the circumstances. These three types of valuation reports are described as follows (increasing in level of complexity and hence, professional fees):
- Involves a minimal review and analysis and little to no corroboration of relevant information
- Provides the least amount of assurance with respect to the value conclusion
- Common uses: estate planning, preliminary negotiations
- Example: The valuation is being used for internal purposes and only a general indication of value is required.
- Limited review and analysis of relevant information and limited corroboration of relevant information
- Provides a moderate level of assurance with respect to the value conclusion
- Common uses: shareholder disputes, settlement of matrimonial property, trial proceedings
- Example: One or more parties are utilizing the valuation to resolve a dispute with financial implications.
- Involves a comprehensive review and analysis and corroboration of the provided information
- This report provides the highest level of assurance with respect to the value conclusion
- Common uses: contentions high-risk matters, high-profile trial proceedings, public securities matters
- Example: A highly contentious matter where the value is being relied on by a large number of users.
Calculation Reports are inherently limited in that they involve a simplified approach to valuing a business. For this level of report, the valuator performs a minimal amount of analysis, which may not consider all the industry and company-specific factors that would affect the ending value conclusion.
An advantage of the Estimate Report is that the larger budget (in comparison to a Calculation Report) allows for more investigation into the critical value drivers of the business which will provide a clearer indication of the company’s worth.
The suitability of each type of report really depends on the purpose of the valuation – why is it needed and how will it be utilized by your client? With a valuation for estate planning purposes or for preliminary negotiation purposes, a lower-level (and less expensive) Calculation Report is likely sufficient. When the report is to be relied upon by the client (or the court) to make a significant decision (ie. shareholder dispute or expert evidence at trial), a mid-level Estimate Report may be warranted. Comprehensive reports, while providing the highest level of assurance, are generally reserved for the most contentious situations due to their high cost.
In practice, the vast majority of valuation needs by Saskatchewan privately-owned businesses are met by the first two levels: Calculation and Estimate Reports.
Critiquing Another Expert’s Report
It is not uncommon for a party to be dissatisfied with the results of a formal business valuation. In which case, as they may with a Doctor, they can ask for a second opinion. A second valuator can be engaged to investigate if the resulting value is reasonable and critique the original valuation. These comments can be provided verbally, or alternatively in what is referred to as a Limited Critique Report.
A Limited Critique Report is more limited in scope from a standard valuation report and it does not re-perform the valuation-nor does it provide an overall opinion of value of the business. It is instead restricted to commenting on and calculating the impact of potential errors and weaknesses in the original valuator’s report. These comments and calculations might address technical errors in the calculations, unreasonable assumptions or omissions of relevant facts, or improper use of methodology–all of which can have a significant impact on the resulting value.
Although restricted in scope, a Limited Critique Report is generally an effective option compared to a full-form report when considering a response to an existing valuation report. It can also usually be completed in a shorter timeframe, and allows the reader to better understand the key variables impacting value which can be focused on.
When is a formal report actually required?
The general rule is that if a valuator is providing a value conclusion in writing, our professional standards mandate that it is required to be in a formal report. The standards do not apply to any type of verbal discussion whether it be commenting on proposed values or assisting in a negotiation.
If not engaged as an independent expert, a valuator can assist in the following without the requirement of preparing and issuing a report:
- Any verbal discussions
- Providing general written comments – advice and strategy
- Assisting legal counsel structure financial options for use in settlement negotiations
- Assisting as an advisor for negotiation purposes
- Compiling cash flow projections for financing purposes
There are also situations where a client believes their company’s shares may have negligible value and is uncertain about whether a valuation is needed. A conversation with a Chartered Business Valuator can help identify whether it is a worthwhile expense to acquire a formal valuation.
When In Doubt, Consult with your local Valuator
A quick phone call to your local valuator can give you an idea of the main valuation issues affecting your client, the available options and some preliminary thoughts on the next step to proceed. A formal valuation might not be needed in all situations, but when it does, you’ll want to make sure it meets your client’s needs.