Understanding the business valuation process

Using a business valuation expert can lead you to ask yourself a number of questions: what are the expert's responsibilities? How will they carry out their work? How can they help me? In the following text, we will try to cover these questions in order to better define the role of the valuer, whatever your project.

Why have your business assessed?

Chartered Business Valuators (CBVs) are members of the Canadian Institute of Chartered Business Valuators. This designation, which undergoes a rigorous accreditation process, is recognised by the international business community.

Assessors can exercise their skills by taking on several roles depending on the assessment contexts presented to them. They can act as independent experts, advisers, mediators and arbitrators. He or she will be able to adapt and guide you according to your needs.

In what context is a business valuation carried out?

You may need to consult a business valuation expert in a number of contexts, but the most common situations are as follows:

• Buy, sell and merge businesses

• Tax reorganisation, transfer to children

• Shareholder agreement

• Share purchase option

  Litigation and/or divorce

  Expropriation

• Purchase price allocation or impairment test

The valuation levels of a company

The business valuer will want to determine the intended use of the valuation and the level of assurance required depending on the client's situation. There are three levels of valuation, i.e. three types of report that differ not only in the extent of the valuer's review and the amount of information they contain, but also in the level of assurance provided in the conclusion. This is reflected in the precision of the value range obtained:

• Valuation report covering value calculations

• Valuation report covering an estimate of value

• Exhaustive valuation report

The choice of the type of valuation report should take into account the purpose for which the valuation report will be prepared, the availability of information on which to base a conclusion and the level of assurance sought by the client.

Assessment approaches and methods

The business valuation expert will determine the valuation method(s) best suited to the situation, i.e. the asset-based approach, the performance-based approach, the market-based approach or a combination of these three methods:

• The asset-based approach

  The asset-based approach is generally used when the business is deemed to be unviable or underperforming.

  Three methods are generally used, either restated net assets, orderly liquidation or forced liquidation depending on the urgency of the situation or the difficulties of the business. The restated net assets method can be used even if the company offers a return, since the value of its assets is greater than its return (e.g. real estate company). With the forced liquidation method, the value is often lower since some assets will have to be sold more quickly and, as a result, will be offered at a lower price.

• The return-based approach

  This approach is commonly used for businesses that generate reasonable profits and whose value is greater than their net assets alone. Two methods are generally used in the return-based approach, the capitalisation of characteristic earnings or discretionary cash flows and the discounting of future after-tax cash flows.

  The capitalisation of characteristic earnings or discretionary cash flows is generally used when a company has stable earnings or cash flows with predictable long-term growth. The method is based on an analysis of the company's representative historical results in order to establish a representative profit/cash flow, which is then capitalised using a multiple reflecting the risks inherent in the company and the industry.

  Discounting of future cash flows is generally used for companies at the growth stage. This method is a present value calculation using the company's projections of the cash flows it expects to generate. It is therefore based on the company's projections for future years.

• The market-based approach

  The market-based approach represents what investors are prepared to pay for a comparable company. The main elements of differentiation relate to size, market served, product range, financial strength, growth potential, etc.

What to remember?

Business valuation is a complex process that is not an exact science. Although the information in this text is useful for understanding the work carried out by an expert, consulting him remains the best source of information for your particular situation.  

Mallette has solid experience in business valuation and brings together expertise from all the disciplines required for concerted action. Don't hesitate to contact us!