When a holding company is being valued, business owners typically think the valuation is quite straightforward. This is not an unusual expectation given that most holding companies are simply there to hold assets without engaging in any business activities or operations of their own. Assets may include shares of a related company that is active in operations, investments such as public company shares or mutual funds, and fixed assets, such as property and equipment.
However, when performing a valuation of a holding company there are a few considerations a business valuator must think about. For simplicity, our example will focus on one kind of holding company: a real estate holding company.
The valuation of a holding company would typically take the form of an asset approach. Assuming the holding company is a going concern (i.e., does not appear to be in distress and will not declare bankruptcy in the foreseeable future), the valuation is calculated by taking the fair market value of assets, net of the fair market value of liabilities at the valuation date. Given that in a real estate holding company the main asset typically held is property (e.g., land and buildings), we will focus our valuation discussion on one of the issues involved with disposal of property.
When there is a disposal of property, valuators consider what the fair market value of the property would be. Fair market value may be determined by a property appraisal prepared by an appraiser, or by using a government-issued property tax appraisal. If the property is assumed to be sold on the valuation date or immediately after, 100 percent of the taxes are recognized and deducted against the fair market value of the property. However, if the property is going to be held in the foreseeable future (i.e., the property is earning a market rate of return and a potential buyer would keep the property to continue earning this revenue stream), valuators consider the timing of the eventual disposal.
Scenarios are run to capture a proper present value of the timing factor for the tax on disposal. In our profession, the recognition rate used and applied against the taxes at disposition of the property is a matter of professional judgment and may range from 0 percent to 100 percent depending on the valuator’s assumptions. Depending on the circumstances, 50 percent is a common recognition rate used amongst valuators to capture the uncertainty on whether the property would be sold immediately after the valuation date (100 percent recognition rate) or the property would be kept indefinitely (0 percent recognition rate).
As seen in the example above, a valuation of a holding company is beyond a simple math exercise and has many considerations. As such, a valuator would typically consult with the business owner regarding the identified issues even if the company is just a holding company.
CPA, CA, CBV
Partner - Advisory Services
Mike has over 25 years of experience providing accounting and business advisory services, with a focus on the Canadian insurance industry.
CPA, CA, CBV
Alex Wong is a partner at Smythe Advisory and is focused on being a trusted business advisor to his clients.
CPA, CA, CBV
Director of Valuation Services
Paul Woodhouse focuses on providing financial advisory and litigation support services to clients.
CPA, CA, CBV
William Tam is a senior manager at Smythe Advisory, and is focused on providing valuation and financial advisory services to his clients.
Gagandeep specializes in M&A advisory engagements, as well as business valuations in the contexts of management buyouts and succession planning.