Business valuation is a high stakes exercise. An error or an
assumption change has the potential to change the value conclusion
by a significant amount.
Whether transacting in the open market or valuing in the
notional market, it pays to spend some time critically evaluating
any business valuation prior to agreeing on the final value.
A good critique will focus on critical judgments, assumptions
and high-risk areas.
Some key areas that one should consider examining when
critically evaluating a business valuation include:
Confusing credentials – check that
the valuator possesses recognized business valuation
Misapplied models – check the
appropriateness, mechanics and integrity of the valuation model
Favorable forecasts – be cautious of overly
optimistic growth assumptions.
Rogue relationships – to ensure the
transferability of value, consider the continuation and
transferability of key business relationships.
Amazing adjustments – examine the
rationale and supporting data for all adjustments made to the
historical cash flows/earnings and valuation date balance
Awesome assumptions – review the
reasonability and support regarding key valuation assumptions.
Suspect source data – check the
accuracy of the quantitative and qualitative data and ensure it
links back to a reputable source.
Dubious discount rates – ensure
there is adequate support for the discount or capitalization rate
Tricky taxes – be wary that taxes
have been accurately calculated and consistently applied using the
tax rates existing at the time of the valuation.
Devilish discounts – there are many
potential value discounts (e.g., minority, marketability, key man,
blockage, risks, contingencies, etc.). Consider the rationale and
support for any discounts applied, and consider the possibility of
any appropriate discounts that may be missing.
Suspect synergies – consider what
discounts may be applicable to any merger synergies, as they are
inherently risky and may not be realized.
Specific standard of value – ensure
the valuation report is prepared in accordance with the appropriate
value standard (i.e., fair market value, fair value, etc.).
Rueful rules of thumb – be wary of
rules of thumb. They may not be specific to the individual
Latent liabilities – examine the
notes on the financial statements, corporate ledgers and any other
sources for potential unrecorded liabilities.
Revealing related party transactions
– ensure that any related party transactions are adjusted
to arm's length amounts.
Business valuation is a complex process. As such, there is the
potential for significant errors and changes in value due to
differing value assumptions and professional judgments. The length
of this article, does not allow us the opportunity to adequately
cover all the pertinent valuation issues one should consider. We
have only provided a sample of some key areas to be examined.
If significant amounts are involved, due to the complex nature
of business valuation, it is generally prudent to consult an
experienced accredited valuation professional when attempting to
determine the value of a business.
Should you have any questions or require more information, we
invite you to contact members of our Business Valuations Group who
will be able to assist you.
The above noted list is not intended to be comprehensive
and is not intended to be relied upon in the place of obtaining the
services of an accredited business valuation
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
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