When and How to Engage a Chartered Business Valuator (“CBV”)
This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.
When to involve a CBV
Business owners and legal advisors are often unsure when the services of a CBV are needed and to what extent. Depending on the situation, a CBV could be engaged to act as an independent expert or in an advisory role, where there is no expectation of independence. CBVs are often engaged to work in conjunction with other professionals such as lawyers, accountants and tax specialists.
Examples of situations where a CBV can be involved in are as follows:
- Breach of contract
- Loss of profits
- Business interruption
- Personal injury
- Shareholder disputes
- Matrimonial disputes
- Income tax matters
- Estate planning and corporate reorganizations
- Mergers, acquisitions and divestitures
- Management buy-outs
- Financial reporting (IFRS and ASPE)
- Unanimous shareholder agreements (USA)
- Employee share ownership plans (ESOP)
Range of involvement of the CBV
As a trusted expert, the CBV typically provides an expert report containing an independent professional opinion. In doing so, the CBV exercises significant professional judgment and employs his/her experience and independent research. Independent opinion reports prepared on objective basis include the following:
- Expert Reports related to loss quantification in a litigation context;
- Limited Critique Reports where one CBV comments on the opinion of another CBV usually in a litigation context; and,
- Valuation reports (e.g. Calculation, Estimate or Comprehensive level or reporting) defined as follows:
- Calculation Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on minimal review, analysis and little or no corroboration of relevant information, and is generally set out in a brief Valuation Report
- Estimate Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on limited review, analysis and corroboration of relevant information, and generally set out in a less detailed Valuation Report
- Comprehensive Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on a comprehensive review and analysis of the business, its industry and all other relevant factors, adequately corroborated and generally set out in a detailed Valuation Report
CBVs can act in an advisory capacity where there is no requirement for objectivity or independence, such as:
- Reviewing draft agreements and summarizing financial information;
- Providing general valuation analytics, observations and recommendations;
- Providing calculations using directed methodology, techniques, assumptions and inputs; and,
- Interpretations only in verbal discussions and schedules summarizing computations which would not qualify as an expert opinion.
How to engage a CBV – the Engagement Letter
The engagement letter identifies the parties to the engagement and by whom the CBV is being retained (e.g. client, legal counsel or jointly). Additionally, it provides a written record of agreed terms that eliminate potential misunderstandings and expectation gaps, sets out fee rates, and outlines conduct of the engagement including the expectations of the client’s cooperation and responsibilities. It also sets out the following:
- Nature of services and type and level of report being provided;
- Type and level of report being provided;
- Valuation Date and period of indemnity (if applicable);
- What is being valued or quantified and purpose of report;
- Reference to the applicable Standards of the Canadian Institute of Chartered Business Valuators (“CICBV”);
- Statement of retention of CBV as Independent or as an Advisor;
- Any restrictions or limitations in the Engagement;
- Any specific assumptions we have been asked to make; and,
- Provide definitions of the terms to be used to arrive at our opinion (for instance, “Fair Market Value” vs. “Fair Value”).
Look for accreditation and experience
A CBV designation is the accreditation from the CICBV which entails carrying out a comprehensive program of studies and experience requirements. CBVs are nationally and internationally recognized as financial experts in valuing businesses and components of cash flow (e.g., losses, financial and intangible assets). Experience in a particular industry may be an advantage in certain valuations and provides some comfort, but on its own is not a substitute for qualified professional valuation knowledge and broad industry experience. CBVs are recognized by the courts and the business community as reliable experts.
Finally it may be tempting to use a valuation report that was prepared at a previous date and/or for another purpose. This may not be appropriate since the different purpose or the passage of time may have rendered to valuation report inappropriate at the current date – valuations can have a short shelf life. Business owners and legal advisors should be aware of when to engage a CBV to ensure risks related to valuation or litigation are managed appropriately through qualified valuation experts whether it is in an independent expert or in an advisory role.
Irrespective of the purpose for which the CBV is being engaged, involve the CBV as early in the process as possible.
Contributed by Michael Frost, CPA, CA, CVA from Mowbrey Gil. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.