How to make your own judgments on the quality of a business valuation report?

In litigation files in which I am involved, I am often called upon to review and give my opinion on the quality of the business valuation report. As an expert, I look at the report in detail. I understand that it is difficult, for a non-expert, to judge a report’s quality just by taking a look at it. On the other hand, there are some elements that can be looked at to get an initial opinion on the quality of a business valuation report. That being said, we cannot operate in absolute. The criteria mentioned in this article are the criteria that will increase or decrease the probability of having a good quality report. Those criteria cannot, under any circumstances replace the assistance of an expert. So what should a non-expert look for?

1. The training and experience of the business valuator

If the valuator has specialized training in business valuation and/or has valuated a large number of companies and/or regularly valuates business, then the higher the probability is to have a high quality report produced. The opposite is also true. Less the valuator is specialized and trained, the less likely the probability of producing a good quality report, unless the valuator appraises businesses on a regular basis.

Usually, a Chartered Business Valuator (CBV) with specialized training in business valuation has performed numerous valuations on a regular basis. When you review a business valuation report, you should ask questions about the items mentioned above. The valuator’s identity should be clearly visible in the report

2. Compliance with CICBV’s Standard No. 110

The second element that you should consider is whether the report meets Standard No. 110 of the Canadian Institute of Chartered Business Valuators (CICBV) or not. It can be found on the website www.cicbv.ca.

This standard specifies the elements that should be included in a professional valuation report. A professional business valuator should follow this standard. If the report produced does not follow this standard, higher is the probability that the report is not of good quality.

3. The clarity of the report

For me, another item to look for is the clarity of the report.

• Which company was valuated?
• What is their field of activities?
• What is the reason for which the report was prepared?
• On what date is the entity valuated?
• What are the valuation techniques that were used?
• What is the definition of value?
• What is the conclusion?

We can presume that if the valuator was able to organize this information to be easily identifiable, then he was able to adequately organize the rest of his mandate as well. This may suggest that the report is of higher quality than a report where such information is hard to find.

Valuation report assessment: Specific criteria

To produce a business valuation report, a valuator must review multiple documents. The financial statements for the last 5 years and certain tax documents provide relevant information and are considered in a valuation.

Sometimes the valuator does not have access to these documents or some of them have been forgotten. To assess the full scope of the valuation, it is important to know if the valuator received all the documents he requested. If he did not receive everything, his assumptions and conclusions could probably be affected. There is also a possibility to have a reserve. In this section the valuator will record the access to documentation and information needed to proceed with the business valuation.

It is important to know if the valuation has expanded his investigation to the prior 4-5 years or if he considered the previous year only.
Looking at trends in revenues over the last four to five years, the valuator can have a hypothesis about the business’ profitability that is closer to reality than if he would have only considered the previous year.

The number of valuation techniques used is a good indicator of the experience and confidence of a business valuator towards his work. There are several valuation techniques. In practice, valuators use between seven and eight techniques. Usually, an experienced valuator will not use more than two or three technical assessments in the same business valuation. Using more than one valuation technique allows the valuator to confirm the result and present it from a different approach. On the other hand, using too many can be seen as a lack of confidence and experience.

Key point to remember

The production of a business valuation report is a complex task that requires specialized expertise. You can’t improvise being a business valuator. A valuation report should always be produced according to the CICBV standards. The initial quality control of a report can be ensured by reviewing the criteria mentioned in this article. If you want to produce a business valuation report for your clients or want an expert opinion on a report that was handed to you, contact me. It will be my pleasure to offer my expertise. I can help you, I have appraised more than 1,000 business over the last 10 years.