6.04: Credibility in valuators’ reports
Credibility in valuators’ reports reflects (a) the credibility of the CBV and (b) the credibility of certain decisions made by the CBV in preparing his or her report. The credibility of the CBV is derived from:
- Qualifications: the CBV (“EEE” in Quebec) is the preeminent business valuation designation in Canada. Many CBVs are also Chartered Professional Accountants, MBAs or Chartered Financial Analysts, all of which add to the skills held by the CBV.
- Experience: valuing businesses is not a simple mechanical exercise. It involves the exercise of considerable professional judgment in respect to the likely future success of, and the risks faced by, the entity being valued. The more complex the CBVs business and financial experience, the better equipped that CBV is to understand the key issues that determine the valuation conclusion.
- Independence and Objectivity: notwithstanding that in some circumstances the CBV may not be required to be independent of the client, the CBV should in all cases demonstrate detachment from the issues at hand. Only in this way is the CBV able to offer objective advice or prepare an unbiased opinion.
Of all the qualities that should be considered when selecting a CBV, credibility is probably the single most encompassing issue.
The decisions that a CBV makes when preparing a report can affect the report’s credibility. Some of the CBV’s most important decisions relate to the:
- Assumptions made
- Scope of the report
- Appropriateness of the approach and methodologies
- Suitable capitalization rates (for cash flow based methods)
- Level of assets required to support the level of business (which leads to the identification of redundant assets)
- Discounts applied for lack of control or lack of marketability
- Treatment of personal goodwill
- Interpretation of shareholders’ rights
- Use of data from market samples
- Influence of “special purchasers” on value
- Use of hindsight
- Treatment of disposition costs
Contact MVI to discuss how we will add credibility to your reports.