canadian institute of chartered business valuators
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Chartered Business ValuatorsThere’s a leap of faith...
then there’sresults-driven advice
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Grant Thornton LLP. Canadian Member of Grant Thornton International
At Grant Thornton LLP, we embrace the entrepreneurial spirit, including the perennial leap of faith. What we bring
to the table is balance and clarity. Whether it’s buying or selling a business, considering strategic investment,
sourcing debt financing or investment capital, our team is trained to help you find the answers you need in today’s
challenging business environment. To find out more about how your intuitive leaps of faith and our objectivity can be
translated into bold steps forward please contact one of our Chartered Business Valuators listed below.
John Carruthers, Halifax, [email protected]
Norm Raynard, Moncton, [email protected]
Bo Mocherniak, Toronto, [email protected]
Gord McFarlane, Calgary, [email protected]
Glen Harry, Vancouver, [email protected]
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SOONER OR LATER, when considering a majorbusiness deal, the CEO and strategic team will arriveat a Rubicon moment. The go or no-go decision willdepend on the information they use to calculate thebottom line. How much value will shareholders see?
Ah, but the answer can be elusive. These days, findingthe bottom line can be like trying to get dressed withthe lights out, searching in a drawer to separate ablack sock from a blue sock. Sometimes the assets tobe evaluated cannot be seen.
As a senior executive or business owner, you knowhow challenging it is to define the value of a businessasset. But then again, maybe you don’t.
Maybe you rely on traditional accounting methodsto show how much your company, or an asset you wouldlike to acquire, is worth. But traditional accounting isbased on historical costs. Value — real business value— is about the future, not the past.
It is also increasingly about assets other than bricksand mortar. Much of the value of companies today,as seen by potential purchasers or investors, is basedon intangible assets such as brands, contracts and theexpertise of employees. That’s what often makes theart of the deal so much like finding things in the dark.
Chartered Business Valuator Stephen Cole of Torontosays: “In some cases, particularly with emergingtechnology companies or distressed companies whoserecent past has not been successful, it’s difficult todetermine their value — because value is all aboutthe future and there is no historical guide.”
Some CEOs, it seems, don’t know how to approachthat. A survey of Canadian executives, includingCEOs, CFOs and business owners, has found thatalmost one-half are not aware of the term businessvaluation.
The survey was conducted in the fall of 2003 byThe Canadian Institute of Chartered Business Valuators(CICBV). It revealed a certain amount of confusionabout values. Although senior executives certainlyknow what they value in their personal and businesslives (see below), they are struggling with conceptsof asset value. They believe that it is easier to placevalue on tangible rather than intangible assets, butthey also see that intangible assets do not have lesservalue, so they have a dilemma with respect to valuatingthings that cannot be seen.
“The valuation of something that can’t be seen isvery subjective,” says Carl Merton, a senior manager
with KPMG LLP in Windsor, Ontario, and chair ofthe CICBV’s Communications Committee.
“If I buy a building for $1 million, I can show thaton my financial statements, but if I hire an employeewho is brilliant and helps me to build better productsfor my customers, then how do I record that as anasset on my books? I can’t, because of the historical costbasis of accounting.”
“Many CEOs are aware of the problem, but not ofthe solution,” Merton says. “They are not aware ofChartered Business Valuators and how we can helpwith this dilemma.”
Chartered Business Valuators, or CBVs, have beenrecognized as distinct professionals since 1971, whenfederal taxes were imposed on the sale of capital assets.The CICBV — now the largest valuation organizationin Canada, with more than 1,000 members — wasformed to train and guide people who could value assetsaccording to recognized standards and methodologies.
A professional valuator gains the CBV designationonly by taking and passing a rigorous set of coursesand exams, gaining practical experience in the field ofbusiness valuation, being judged by peers as qualified,and adhering to the Code of Ethics and PracticeStandards of the CICBV.
“The distinguishing qualification of a CBV isexpertise in determining a likely asking price to beexpected in the market for an asset — the value,”says Donald Spence, a past president of the CICBVand a financial advisory services partner with BDODunwoody LLP in Kelowna, BC.
“The skill set gained through experience and trainingputs a CBV in a position to identify the value driversin any business. From a CEO’s perspective, that isimportant because it is his or her task to increase thevalue of a business.”
The corporate status of CBVs is rising. Since 2000,the dot-com bust and revelations of corporate accountingmalpractices have made executives and investorsmore careful about the value of assets. New accountingstandards, too, have raised the importance of businessvaluations. But a major reason why CBVs are morefrequently called upon as strategic advisers is thatthey help companies make better decisions.
Stephen Cole, managing partner of Cole ValuationPartners Limited, says the advice of a CBV can keepbusy executives “grounded.” As an example, his firmrecently provided advice to a publicly traded company
that was considering buying a privately held technologyfirm. Cole recommended against paying a lump sumcash price for the company, since its value reliedalmost entirely on intangible assets and could not beaccurately estimated. Instead, the client followedCole’s advice to “drip-feed” the target — that is, toobtain an option to purchase in exchange for lendingmoney to the firm. After a year of acting as a lender,during which time the public company gained athorough understanding of the technology firm andconducted due diligence, it completed the acquisitionon favourable terms.
“It’s important not to get caught up in the chase,”Cole says. “Often, aggressive CEOs with growth man-dates don’t take enough time and care with acquisitions.A CBV can help them keep value perspectives in mind.”
CBVs across the country report that their clientsare now seeking their advice early in the process ofmaking major decisions. Sometimes the result is thata proposed transaction is cancelled. In Montreal,Denis Labrèche, senior vice president of Ernst & YoungCorporate Finance Inc., recalls several incidents inwhich clients took his advice to walk away fromproposed acquisitions of technology companies.
“With our rational approach to value, we avoidedhorror stories,” Labrèche says.
Tom Strezos in Toronto can claim the same kind
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of satisfaction. He leads the valuation and litigationsupport group at Mintz & Partners. A few monthsago, a client was interested in purchasing a companyin the health-care industry. But the Mintz valuationteam found that the target company’s stated valuewas not there. Financial statements were not in order,
and some claimed contracts didn’t exist.“It was fortunate that we got involved before they
signed a deal,” Strezos recalls. “The target companyeventually went bankrupt, and our client almostbought them for $8 million!”
In another instance, involving a lawsuit, a Mintz
client was suing a former partner who had left thefirm and taken a contract with him, contrary to anon-compete agreement. The client estimated thevalue of the loss at up to $100,000.
Strezos says: “They used a net-income approachbut we used a contribution-margin approach — salesless variable expenses. We worked with their lawyerto develop a true understanding of the losses, andput together a report that the company had in factlost more than $750,000.”
Such discrepancies can be very confusing. Whatcauses them? It’s not necessarily a matter of oneparty being right and the other wrong. Perspectivesvary; market conditions change. CBVs are the first toadmit that valuation is an art, not a science. The artistryof the CBV, however, is recognized and acknowledgedby the legal system.
“We’ve been trained to establish value,” DenisLabrèche points out. “We have various methodologies;we don’t look at a company only one way, becausethere are different ways to evaluate a business. But that’sour specialty. Others do it only on a part-time basis.
“What CEOs don’t know very much is that thereis only one professional body that is recognized inCanada by the courts to do business valuations, andthat is The Canadian Institute of Chartered BusinessValuators.”
Buying and Selling a BusinessBusinesses of all sizes rely on CBVs to provide expertvaluations for many kinds of business transactions.Often these involve the sale or transfer of a businessby its owner. It’s a growing trend. In the coming decade,a great many business owners will be retiring.
How much will they be able to realize from theirbusinesses to support their retirement? Part of theanswer, as every CBV knows, will probably depend onthings that the CEO may not have thought about.
How marketable is the business? Are its financialstatements and management information systemsup to date? What is the future value of its contractsand other intangible assets? And what is the growthpotential of its market?
Such questions, and many more, are sometimesoutside of the owner’s comfort zone. Many entrepreneurstake great pride in their businesses, especially thephysical premises they have built.
“A prospective seller often looks at the bricks andmortar, but the true value of the business is based on theprofit it can generate in future,” says Denis Labrèche,who has helped sell businesses for a quarter of a century.“An entrepreneur sometimes looks on a business likea son. What a CBV can do is to take the emotionout of the sale, understand the buyer’s perspectiveand bring a financial rationale to the process.”
Chartered Business Valuators
There is only one way to determine the value of a business
and this is not it.
You would never count on a crystal ball to determine businessvalue, but a Chartered Business Valuator (CBV) will always providethe definitive analysis. Whether you're making an acquisition,bringing on partners, selling your business, tax and estate planning,involved in litigation or require scrutiny of corporate financialissues, the expert insights of a CBV are worth knowing.
For more information about The Canadian Institute of CharteredBusiness Valuators and how a CBV can help you, please visit us at:
www.businessvaluators.comor call 416 204-3396
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Donald Spence, who has written a book forBDO Dunwoody called Selling your Business ForWhat It Is Worth, says that perceptions of buyers andsellers can sometimes be opposites. What an entre-preneur might see as a strength, such as his or herown decision-making ability, might be viewed as aweakness by a buyer looking to the future.
“I did a valuation of a steel-fabrication businessin BC about seven years ago, for an owner who wasbuying out a shareholder,” Spence recalls.
“The valuation highlighted many weaknesses inthe business, as well as positives. One negative was itsabsolute dependency on the owner to do everything.That was a significant limiting factor in the growthof business. Also, if the owner was planning to sell,a buyer would see the business as highly risky.
“Since then the owner has hired a managementteam, including a sales manager and a plant manager.Other things being equal, his company is of highervalue today than it was seven years ago, because ofthe management depth.”
Similar kinds of issues come into play when busi-nesses are passed to a second generation within afamily. There’s the added complication that the founderwants to realize enough value from the business tomeet the goals of both retirement and estate planning.
Business owners in such circumstances often “freeze”the value of their estates. That is, they will exchangetheir common shares for preferred shares, with a valuefixed at a certain date. On death, their estates willbe taxed only on the value of those preferred shares.Any additional value that is added to the companyafter the valuation date is allocated to the commonshares that are issued to the sons or daughters whotake over the business.
Sounds good — but what is the underlying valueof the business upon which the estate freeze is based?
“CBVs can help in structuring the estate planand determining the appropriate values,” says FarleyCohen, senior principal in the Toronto office of KrollLindquist Avey. “We can be a very productive part ofthe team, working with tax counsel, the estate lawyersand the parties themselves.”
Another important aspect of succession planningis to have an insurance plan that helps cover estatetaxes at death. CBVs can help in determining howmuch tax there is going to be, and how much insuranceis necessary without being excessive.
Cohen, who is also head of the Canadian valuationservices group of Kroll Inc., says that too many CEOsof family businesses don’t know the importance ofvaluing their corporate assets before succession takesplace.
“A lot of people don’t deal with this at all. If theydid, there would be fewer family feuds. If people startplanning early, and put succession plans in placeproperly ahead of time, things can be a lot smoother.”
Fair Value ReportingBusinesses large and small are subject to more scrutinythan ever. Publicly traded companies need to takeparticular care with their financial reporting, especiallyregarding acquisitions. The rules have changed, and
the expertise of a CBV is often required to see thatnew rules are followed. A CEO who doesn’t knowthis could steer into trouble.
Whereas, in the past, two senior executives meetingto plan a business combination might calculate assetvalues on the back of a napkin, now they are subject to
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FAIR VALUE AND THEANNUAL IMPAIRMENT TEST FOR
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Since 1979, our practice has been devoted exclusively to businessvaluation and litigation support. We act for accounting andlaw firms, private businesses and multinational corporationsacross the country. We are also valuation advisors to federaland provincial governments and their agencies.
Our Chartered Business Valuators assist management, auditorsand corporate boards by valuing Goodwill, Intellectual Propertyand other Intangible Assets for the Annual Impairment Testand the allocation of Fair Values in business combinations,required by Generally-Accepted Accounting Principles.
As independent experts, we have been playing an active leadership role on the governing bodies of both the Canadianand U.S. societies that set the high standards of our profession.
Visit our Website for more information about us and the valuation authorities we co-authored, Guide to CanadianBusiness Valuations (Carswell) and Financial Litigation:Quantifying Business Damages and Values (CICA), as wellas our numerous in-depth articles, chapters and conferencepapers published on both sides of the border.
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something called fair value within financial reporting.In 2001, the Accounting Standards Board in Canadaintroduced accounting and financial reporting standardsaffecting intangibles and goodwill acquired in the pastand future. Under these standards, when companiesacquire a business, the purchase price must be allocated
for financial reporting purposes to intangible assetsand the residual attributed to “goodwill”. This allocation requires the assessment of the fair value ofacquired intangible assets, such as trademarks, software,mastheads, contracts and customer lists.
This change is important to management, who
are responsible for financial statements, as well as toinvestors.
Jay Patel, vice president of Ernst & Young CorporateFinance Inc. in Toronto, notes: “Every corporation,public or private, has shareholders whose main interestis in understanding financial performance. In a publiccorporation, shareholders are removed from theoperations, so the critical piece of information theyrely on is financial statements. In private companies,the major shareholder is a manager, but still needsdiligently prepared financial information.”
Why should the CEO or CFO consider using aCBV in the context of fair value reporting?
“The reason is that CBVs bring third-party, professional, objective opinions to the table,” Patel says.
That is in the spirit of the new accounting guide-lines, and the new laws and regulations in Canadaand the United States that back them up.
Richard Wise, a CBV from Montreal who is apast president of the CICBV, points out: “The newrules require that the fair values of the intangibleassets be measured and disclosed. You now have fulldisclosure, which helps someone understand andproperly interpret a financial statement. Otherwise,if everything is buried in goodwill, you don’t knowits true value.”
Wise is managing partner of Wise, Blackman, aMontreal-based firm of business valuators and forensicaccountants. He, like others in the valuation andaccounting professions, is watching the concept offair value become more and more entrenched.
Today, the standards require that assets obtainedin a business acquisition be evaluated annually, atleast, to ascertain whether their fair value exceeds theamount paid. If so, the value of those assets must bewritten down on financial statements. Fair-valueaccounting is also required for all assets of a companyemerging from bankruptcy.
Tomorrow, the same standards may be applied ona broader scale in the interests of transparency offinancial reporting. There is growing recognition thatbalance sheets do not account for the value of corporateassets built up internally over time, such as brands andpatents. Task forces of accounting regulatory bodies inNorth America and Europe have begun to discusswhether to require companies to prepare financial state-ments based not on historical costs, but on fair values.
Any such change could take years, but the discussionsnevertheless point to an increasingly important rolefor business valuators who can calculate current valuesand the worth of intangible assets.
As Wise points out: “A CBV has undergone a veryrigid study program and gained practical experience,and can give tremendous input in dealing with theseissues. It’s beyond the ability of the general-practitioneraccountant or the internal accountant of the company,or the controller or the CFO, unless that person istrained and accredited as a CBV.”
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Stock OptionsCBVs have recently become more involved in anotherhot-button topic in executive suites: granting stockoptions.
In the dot-com boom days, such options weregranted routinely as compensation. Employees andothers were granted options to buy corporate stock ata fixed price. They would wait until the stock rosein the market, then exercise their options and sell theshares at a profit.
The problem was the options were typically notshown as an expense on the company’s financial state-ments and the true cost of these incentives to thebusiness was often not given an appropriate level ofconsideration by management before the options weregranted. Exacerbating the problem, the whole areaof stock options is not well understood by investorsand other readers of financial statements.
The tide is turning. In the same spirit of transparencythat inspired changes in fair-value reporting,accounting bodies such as the Canadian Institute of Chartered Accountants (CICA) have providedrecommendations (in the form of Generally AcceptedAccounting Principles) stipulating that when amountspaid by a business as compensation (for example, toa supplier) takes the form of options “an asset, costor sales discount should be recognized… as if theenterprise had paid cash… instead of paying with orusing the equity instruments”. In other words, thecost of that option is to be reflected in its financialstatements in the period in which the cost is incurred.
The CICA has required since January 2002 thatthe cost of such options be reported based on fair value,which it defines as the “amount of the considerationthat would be agreed upon in an arm’s length trans-action between knowledgeable, willing parties whoare under no compulsion to transact.”
People in corner offices have a challenge to figureout what that means, exactly. Some have stopped issuingstock options. For others, who still see them as animportant compensation tool, Chartered BusinessValuator Errol Soriano has some advice.
“Stock options granted to employees or others havea cost not unlike other expenses the business incurs.More and more, management is being held to accountfor the method by which it distributes the business’equity.”
“Any time you are dealing with a significant dollaramount of compensation in the form of stock options,it would be prudent to have a rigorous process todetermine the value of the options before embarkingon what can be an expensive compensation program.Factors to consider in determining the fair value ofoptions are case specific and the analysis shouldinclude quantitative valuation techniques.”
The process is not simple. The fair value of a stockoption is subject to many variables, including, among
many others, the likely future performance (volatility)of the stock and the future performance requirementsnecessary to satisfy vesting provisions.
The section of the CICA Handbook that dealswith stock options covers 48 pages of single-spacedtext. Better call in a CBV.
National Value Survey Just as CBVs are the authoritative voice for the value ofcorporate assets, their national association is becomingthe authority for the values of corporate leaders.
This coming fall the CICBV will release the resultsof its second annual survey of Canadian values. It willcompare those results with those found in 2003, whenthe institute commissioned a survey of 650 businessexecutives, and an equal number of residentialrespondents, to see what they value in life.
The survey, conducted by Oraclepoll Research,found that 99 per cent of business people rated honestyand integrity as an important or very importantattribute, compared with 98 per cent of the generalpublic.
“The survey showed that,despite recent business contro-versies, Canadian executivesand professionals place a veryhigh value on honesty andintegrity, and are also stronglycommitted to family and personal time,” says CICBVPresident Christopher Lee, apartner with Deloitte & Touchein Calgary.
The survey series wasdeveloped by Douglas Armourof Armour Communicationsin Toronto, a Communicationsadviser to the CICBV. He saysit revealed more confidenceamong executives in theirpersonal values than in thebusiness values that they mustunderstand.
“It’s difficult for somebusiness people to wrap theirminds around intangible assets,such as the value of a trade-mark,” Armour says. “Thesevaluations can be fluid overtime, and business people inparticular tend to deal with thehere and now. Understandably,they are very pragmatic in theirapproach to business life.”
The CICBV hopes that, inthe interest of Canadian cor-
porate governance, such pragmatism will lead to therealization that Chartered Business Valuators areimportant sources of expertise for decision-makers,and that their self-governing institute is a necessary bodyto provide professional accreditation and discipline.
Carl Merton, the CICBV’s CommunicationsCommittee chair, says, “It’s important that Canadianbusinesses understand the credibility that the Instituteand the CBV designation bring to the valuationprocess.”
“Corporate values relate more and more to thevalue of intangibles; our survey showed the need formore recognition of a professional organization thatpromotes education and understanding of how toobjectively value corporate assets.”
To learn more about Chartered Business Valuators,their services and the opportunities offered by the profession, visit the CICBV’s web site,www.businessvaluators.com.
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