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Not all Valuation Reports are Created Equal

November 6, 2017

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Be sure you understand the differences when you retain a Business Valuator

At Smythe Advisory, we are often asked to provide quotes for valuation services. In order to provide a reasonable estimate of the cost of preparing a valuation report, it is necessary to obtain some basic information, including:

  • The size and nature of the business in question.
  • The purpose of the valuation (i.e., purchase and sale, a reorganization for tax purposes, financial reporting, litigation – for example, a matrimonial dispute).
  • The valuation date (either a specific date in the past or a “current date”)
  • The specific interest(s) being valued (shares, a specific class, a control vs minority position)
  • The type of report being requested (comprehensive, estimate or calculation).

Now that we have established the basics, it is time to look more closely at the valuation reporting options. Below, you will find descriptions for each type of report, along with examples of the circumstances that might dictate which one is most suitable.

What is a valuation report?

The Canadian Institute of Chartered Business Valuators (CICBV), the leading professional body for valuators in Canada, defines a valuation report as “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 three types of valuation reports listed in the CICBV Practice Standard No. 110 are as follows:

  1. Comprehensive: contains a conclusion as to the value of shares, assets or an interest in a business that is based on a comprehensive review and analysis of the business, its industry and all other relevant factors, adequately corroborated and generally set out in a detailed valuation report.
  2. Estimate: contains a conclusion as to the value of shares, assets or an interest in a business that is based on limited review, analysis and corroboration of relevant information, and generally set out in a less detailed valuation report.
  3. Calculation: contains a conclusion as to the value of shares, assets or an interest in a business that is based on minimal review and analysis and little or no corroboration of relevant information, and generally set out in a brief valuation report.

These reports are distinguished by:

  • The valuator’s scope of review (and therefore the cost);
  • The amount of disclosure provided in the report;
  • The level of assurance being provided in the conclusion.

A comprehensive valuation report requires an expanded scope of review, more detailed disclosure in the report, and consequently provides the highest level of assurance.

A calculation valuation report, on the other hand, relies on information provided by management without any independent corroboration, and the report is generally very condensed, providing the lowest level of assurance.

An estimate report falls somewhere in the middle.

Which type of report is appropriate for you?

Generally speaking, you want to think about what level of assurance is needed, given the purpose of the valuation. If there is a large amount of money at stake, or if the users of the report are not familiar with the company’s business, then you would want greater assurance in the form of a comprehensive valuation report. If the parties using the report are familiar with the business and only want a preliminary indication of value, then less assurance is needed, and a calculation valuation report should suffice.

The following examples will provide some guidance on which type of report might be suitable depending on your circumstance:

It’s important to specify the type of report when getting fee quotes from different valuators to ensure you’re comparing apples to apples.

As a business owner, the value of your business is one of the most important things to understand. If you would like to know more about the value of your business, please get in touch with one of our Chartered Business Valuators.

 

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