valuation reports
Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing to pay or receive to effect a sale of the business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest
There are three levels of assurance:
Comprehensive Valuation Report
A Comprehensive Valuation Report provides the highest level of detail and assurance in determining the value of shares, assets, or an interest in a business. It is based on an in-depth analysis of the business, its industry, and all other relevant factors, offering a conclusion on fair value.
Key characteristics and components of a Comprehensive Valuation Report:
Extensive Review and Analysis:
Involves a thorough examination of the business, its industry, and all other pertinent factors influencing its value.
Detailed Financial and Market Analysis:
Includes detailed financial analysis, industry research, and market analysis.
Risk Assessment:
Incorporates a consideration of potential risks that may impact the business’s value.
Corroboration:
Provides adequate corroboration for significant relevant information and considerations.
Highest Level of Assurance:
Offers the most robust and reliable conclusion regarding the value.
Time & Resource Intensive:
Requires significant time and resources to prepare, leading to a higher cost compared to other valuation report types.
Reserved for Complex Situations::
Often used for complex transactions or situations requiring a high level of scrutiny, such as take-private transactions or litigation.
Estimate of Value:
An Estimate of Value Report provides a conclusion about the value of shares, assets, or an interest in a business, based on a limited review, analysis, and corroboration of relevant information. This type of report offers a mid-range level of assurance and detail, more comprehensive than a Calculation Report but less detailed than a Comprehensive Valuation Report. Estimate Reports are frequently utilized in situations like financial reporting, sales transactions, litigation, and small business acquisitions where a moderate level of due diligence and assurance is desired.
Key characteristics of an Estimate of Value Report:
Basis of Value:
Determined through limited review, analysis, and corroboration of relevant data.
Level of Detail:
More detailed than a Calculation Report, but less detailed than a Comprehensive Valuation Report.
Purpose:
Commonly used for financial reporting, sales, litigation, and small business acquisitions.
Assurance:
Provides more due diligence and assurance than a Calculation Report.
Disclosure Requirements:
More stringent disclosure requirements than a Calculation Report.
Considerations when obtaining an Estimate Valuation Report:
- It’s often recommended when a higher level of reliance or scrutiny is expected for the valuation conclusion.
- For small business acquisitions, it can be suitable when both parties desire more assurance than a calculation valuation without the cost of a full comprehensive valuation.
- Report contents are frequently used as a means to substantiate information being presented to third parties, such as the Canada Customs and Revenue Agency.
- Applications for the report include: estate/succession planning purposes; pre-trial proceedings; analysis of acquisitions; life insurance purposes; shareholder buy/sell agreements; and submissions/income tax elections.
Calculation of Value:
Calculation of Value report (or Calculation Valuation Report) is a type of business valuation report that provides a conclusion on the value of shares, assets, or an interest in a business based on minimal review and analysis, with limited or no corroboration of information. This report offers a higher-level, cost-effective assessment of value and is often used for purposes like internal reorganizations or estate freezes where less scrutiny is expected, and it is generally not recommended for situations like a business sale requiring a higher level of assurance.
Minimal Review and Analysis:
It relies on information provided by management with limited verification from the valuator. Determined through limited review, analysis, and corroboration of relevant data.
Brief Report Format:
Typically, it’s presented in a concise report format.
Limited Assurance:
It provides the least amount of assurance compared to an Estimate Valuation or Comprehensive Valuation report.
Purpose:
Commonly used for tax-driven transactions, internal purposes, or preliminary assessments when a full valuation is not necessary.
Limitations:
It’s crucial for the client to understand the limitations and that the report offers less assurance than a more comprehensive valuation.
When to use a Calculation of Value Report:
- When the purpose is a tax-driven corporate reorganization.
- For internal planning or when a quick, high-level understanding of value is needed.
- When there will be minimal scrutiny of the valuation results.
Valuation Critique:
A valuation critique report assesses the quality and reliability of another appraiser’s business valuation. It involves reviewing the methodology, data, and assumptions used in the original report to ensure accuracy and identify potential weaknesses or errors. This review can help ensure the valuation is sound and support informed decision-making.
The Valuation Critique can be either limited to specific issues or take the form of an overall opinion as to whether the report being critiqued is in fact reasonable, and if not, the likely range of possible monetary error.
END USE It is often useful for a lawyer to have a critique report to justify his or her reliance on a valuation report prepared by the opposing side. It is also of benefit to lawyers who want to vet a valuation report, which they themselves have commissioned.