Every company is different. Each company has its own operational and financing strategy.
Author: Peter Ritchie CPA CA, CBV
Business valuation is very much an art and not a science. The variability in business valuation approach is driven by issues related to what is being valued, the nature of the underlying business, the sector in which the business operates and a variety of other factors.
Hive Advisory Inc. (“HIVE”) and the Hive Network of Hive Advisors (“Hive Network”) is strongly of the view that when performing business valuations a thorough understanding of the company and its fundamental drivers is required. By using a highly tailored approach this allows us to provide our clients with the best possible service. When performing a business valuation engagement we invest the time to truly understand the business and the environment in which it operates. This approach helps to ensure that our valuation conclusions are well thought out, well supported and well communicated.
The need for a business valuation can arise for all sorts of reasons. The key situations that tend to drive the need for business valuations include:
(1) taxation;
(2) financial reporting;
(3) transactions and business strategy; and
(4) litigation support
Taxation
Management has a responsibility to ensure that the company’s income tax structure is as efficient as possible. From time to time tax planning initiatives lead to the need for a business valuation. Business valuations performed for tax related purposes can carry significant implications. It is therefore prudent to ensure that business valuations are of high quality and supportable. Business valuations can be done internally. However, obtaining an independent consulting firm provide the business valuation can provide clear advantages.
The most obvious benefit is that a consultant brings independence to the process. The business valuation process is subjective and nuanced. Through deep prior experience a consulting firm will be in a position to incorporate such nuances into the valuation process. Finally, tax authorities are much less likely to challenge a business valuation performed by an external consultant.
There are a variety of instances where you may need a business valuation for tax related purposes. A few of these instances include:
corporate restructuring;
estate and succession planning;
transfer of intangible between jurisdictions or setting up cross jurisdiction transfer pricing structures; and
dealing with issues related to foreign anti dumping, thin capitalization or similar issues.
Financial Reporting
During the past few years, a move towards fair market value accounting has taken place, mainly led by provisions of IFRS. With the use of fair market value reporting, the financial reporting process has become even more complex. Accordingly, companies are relying more and more on sophisticated valuation analyses in order support their financial reporting processes.
Fair market value measurements can have a significant impact on financial reporting issues. These measurements are often scrutinized by the company’s auditor. We at HIVE have both financial reporting and business valuation experience. As a result, we have a deep understanding of the audit process and auditor expectations and requirements for fair market value measurements. We are also well aware of the risks involved so we take a careful approach in our business valuation engagements in order to ensure that our deliverables will meet the financial reporting needs of our clients.
There are a variety of instances where you may need a business valuation for financial reporting related purposes. A few of these instances include:
purchase price allocations;
impairment reviews;
intangible asset and intellectual property valuations;
investment entity valuation reviews; and
assessment of complex financial instruments.
Transactions & Business Strategy
Business valuations or pricing analyses are an essential element in a transactional context. A key element in any acquisition, divestiture or financing transactions is the assessment of transaction price. The parties to potential transaction will tend to have divergent views regarding price. Pricing analyses in a transactional context may be focused on the identification, assessment and quantification of post acquisition synergies. Accordingly, pricing analyses in a transactional context are often performed using a variety of operational and financing assumptions regarding future performance.
Shareholders may over time diverge regarding their objectives and conclude that one party will depart from the business. Shareholder agreements often provide a structure for the exit of a shareholder. The agreement may contain a designated price or a formula to determine the exit price. In some instances, the shareholder agreement may not set out an exit price formula. In either case a business valuation may be required to assess value based on the circumstances.
We are presently dealing with various headwinds including inflation and interest rate increases and supply chain issues. Some organizations have focused on sales and growth and others have focused on margins and expense management. Another approach that has been gaining traction in recent years is a focus on longer term shareholder value creation. An excellent tool for assessing the impact of business value strategy on shareholder value is the regular assessment of fair market value of the organization which takes performance but also risk into consideration.
There are a variety of instances where you may need a business valuation or multi variate pricing analysis for transaction related purposes. A few of these instances include:
acquisitions;
divestitures;
financings;
shareholder disputes and the application of shareholder buy / sell agreements; and
valuations related to the development and assessment of business strategy.
Litigation Support
Business damages can arise from many different situations, and it would be nearly impossible to cover every variation. Commercial damages may relate to lost profits, diminution in value of the business enterprise or other issues. In some cases, damages may be recoverable from an insurer that will seek to minimise its payout under an insurance policy. We build our business valuation files with rigour so as to help ensure a positive result.
In a marital dissolution where a business interest is owned by one or both of the spouses a business valuation will usually be required. Interestingly, based on a long series of cases, the Ontario Family Law Act focuses on fair value rather than fair market value. We have experience in dealing with valuations based on the fair value concept.
There are a variety of instances where you may need a business valuation for litigation related purposes. A few of these instances include:
commercial damages;
insurance claims; and
marital dissolution.
….either situation, HIVE is here to help!
HIVE’s business valuations group includes Hive Advisors who possesses extensive experience in the preparation of valuation reports for companies operating in a wide variety of sectors, including mining, life sciences, information technology, manufacturing, etc. Our experts hold accredited designations including Certified Business Valuators, Chartered Professional Accountants, and Certified Financial Analysts. HIVE follows the Practice Standards of the Chartered Business Valuator Institute in preparing its business valuation reports.
In most of the cases identified it is usually best to have an early assessment of the business valuation related issues. If you believe that you may need for a business valuation or pricing analysis we are only a call away. We would be pleased to speak with you on a confidential basis to discuss how HIVE may be able to assist you with your issue.
Hive Advisory Inc. (“HIVE”) is a Canadian non-traditional management consulting firm designed to develop and expand a network of highly skilled and experienced, certified, independent and trained management consultants (Hive Advisors) that specialize across various service lines and industry sectors. HIVE brings a network of expert advisors with years of experience and knowledge to help today’s CFOs and CEOs overcome challenges standing in the way of their growth and strategic goals.
