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Catherine Tremblay, cpa , ca, cbv , asa , cff

CONCORDIA UNIVERSITY JOHN MOLSON SCHOOL OF BUSINESS OCTOBER 26, 2015. Catherine Tremblay, cpa , ca, cbv , asa , cff. Richard M. Wise, fcpa , fca , fcbv , fasa , frics , C . Arb ., cva , cff. Partners, MNP LLP. Today’ s Agenda. What is the CICBV?

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Catherine Tremblay, cpa , ca, cbv , asa , cff

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  1. CONCORDIA UNIVERSITY JOHN MOLSON SCHOOL OF BUSINESS OCTOBER 26, 2015 Catherine Tremblay,cpa, ca, cbv, asa, cff Richard M. Wise,fcpa, fca, fcbv, fasa, frics, C.Arb., cva, cff Partners, MNP LLP

  2. Today’s Agenda • What is the CICBV? • Roles of a Chartered Business Valuator • Becoming a CBV • Examples from our experience • Questions and answers

  3. What is The Canadian Institute of Chartered Business Valuators (CICBV)? • Canada’s largest professional business valuation organization, with over 1,700 Members and 1,000 registered students • Established in 1971 • Administers CICBV Program of Studies

  4. Role of the CICBV • Establish professional standards • Establish a code of ethics • Resources for education and admission of members • Continuing education of members

  5. What Do CBVs do? • Determine value of a business, business ownership interest and intangible assets • Standards of value include, among others: • fair market value • fair value • value to owner • CBV’s look at the “whole picture” including business operations, intellectual property, and qualitative factors

  6. Definition of Fair Market Value The highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. SOURCE: International Glossary of Business Valuation Terms.

  7. The Many Roles of a CBV • Independent valuation expert • Expert witness • Advisor to buyer or seller • Succession planning

  8. CBV as Advisor to a Buyer or a Seller • Strategic analysis and corporate finance activities • Readying a business for sale • Advising on price • Acting as an advisor on purchase or sale • Providing operational and financial due diligence • Advising on financing/re-structuring

  9. Career PathsCBVs Work in… • Accounting firms • Public and private companies • The investment community • Financial institutions • Governments and regulatory agencies And as… • Independent specialists

  10. How to Become a CBV • Enroll in the CICBV Program of Studies • Complete six required courses (four compulsory and two elective) • Pass the Membership Qualification Examination (MQE) • Have a sponsor and provide evidence of business valuation experience (1,500 hours)

  11. Examples from our Experience • Shareholder litigation • Damage quantification • Expropriation • Matrimonial litigation • Public to private company • Fresh start accounting • Tax planning and rollovers • Purchase price allocation • Impairment testing

  12. Litigious Situation — Example • Company owned 59%-41% by two shareholders • Both active in business • Buy-sell clause: latest value determined by shareholders based on Appendix to Shareholders’ Agreement

  13. Litigious Situation — Example (Cont’d) • Absent value determination in prior 12 months, value would be greater of: • Latest value determination, and • Book value adjusted for any value increment on real estate • Formula: “Total value of common shares is revenue on latest balance sheet divided by number of common shares” • Controlling shareholder terminated employment of 41% shareholder

  14. Litigious Situation — Example (Cont’d) • Problems with formula: • Revenue on balance sheet? • Total value of common shares? (vs per-share) • Did not contemplate preferred shares issued subsequently in a freeze • Shareholders’ agreement found to be invalid because parties were not shareholders at valuation date (rather, holding company owned by family trusts)

  15. Seller’s Projections • Often optimistic and can be unrealistic • Assumptions must bescrutinized and challenged

  16. Reviewing Seller’s Significant Assumptions • Assumptions go to heart of projections • Evaluate whether “significant assumptions” used by seller/management, taken individually and as a whole, are reasonable • Are assumptions consistent with market information (such as that used by market participants)?

  17. Reviewing Seller’s Significant Assumptions (Cont’d) • Past experience of entity if currently applicable • Assumptions used by management in accounting estimates for financial statement purposes (auditor-reviewed?) • Any risks associated with cash flows, including potential variability thereof and related effect on discount rate

  18. DEVELOPMENT OFDISCOUNT OR CAPITALIZATION RATEAPPLYING BUILD-UP METHOD FOR COST OF EQUITY Example FACTOR 18.0% Company-Specific Risk Factors Other Company Risk(Internal & External) 2.5 Impact of “Size”on Risk 8.2 BUILD-UP Market Rate of Return 4.5 Equity Risk Premium 2.8 Risk-Free Rate

  19. Company Law: Fair Value • Minority shareholder appraisal remedies: • dissent remedy re fundamental corporate changes (CBCA, s. 190) • take-over bids and subsequent compulsory acquisition (CBCA, s. 206) • oppression remedy (CBCA, s. 241) 18

  20. Financial Reporting Purposes FAIR VALUE 2001CPA Canada 2011IFRS

  21. DCF Method is “favourite” method DCF Method applied in 2/3 of cases Court also accepts Guideline Public Company Method Valuator must prove comparability Court scrutinizes comps used more than any other U.S. court Valuation Methods Accepted byDelaware Chancery Court

  22. Court willing to rely solely on DCF Method Prefers management’s contemporaneous projections (More credible if already provided to financial lender, or regulator) Absent management projections, de novo projections require substantial support DCF Method

  23. Professor Aswath Damodaran, Ph.DStern School of BusinessNew York University - 22 -

  24. “Equity risk premiums are a central component of every risk and return model in finance and are a key input in estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice.” Dr. Aswath Damodaran (2013) Equity Risk Premium Component of Capitalization/Discount Rate

  25. Professor AswathDamodaran “People in valuation who know what they are doing can bias up or down.” Dr. Aswath Damodaran “Give Dr. Damodaran a report and within seconds he can tell whose side the valuator is on.”

  26. Main Areas of Focus by Courts • Tax Court of Canada → “Fair Market Value” (employed in ITA more than 1,100 times) • U.S. Tax Court → “Fair Market Value” • Disagreements over FMV mainly on discounts • Subjective, often little quantitative analysis • Delaware Chancery Court → “Fair Value” • Focus is on value of the business itself

  27. Topical Issues (Canada and U.S.A.) • Control values and minority values • Marketability discounts vs. illiquidity discounts • Normalization adjustments to private company earnings • Application of Guideline Public Company Method and Guideline Transactions Method • Discount rates and capitalization rates

  28. U.S. Valuation Authorities (Examples)

  29. Canadian Business Valuation Books 1990 2001 Current Current - 28 -

  30. Questions and Answers

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