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2. Chartered BusinessValuatorsThere’sa leap of faith...
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Chartered Accountants
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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, NS
jcarruthers@GrantThornton.ca
902.421.1734
Norm Raynard,
Moncton, NB
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506.857.0100
Bo Mocherniak,
Toronto, ON
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416.366.0100
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CHARTERED BUSINESS VALUATORS 3
SOONER OR LATER, when considering a major
business deal, the CEO and strategic team will arrive
at a Rubicon moment.The go or no-go decision will
depend on the information they use to calculate the
bottom line. How much value will shareholders see?
Ah,buttheanswercanbeelusive.Thesedays,finding
the bottom line can be like trying to get dressed with
the lights out, searching in a drawer to separate a
black sock from a blue sock. Sometimes the assets to
be evaluated cannot be seen.
As a senior executive or business owner, you know
how challenging it is to define the value of a business
asset. But then again, maybe you don’t.
Maybe you rely on traditional accounting methods
toshowhowmuchyourcompany,oranassetyouwould
like to acquire, is worth. But traditional accounting is
based on historical costs. Value — real business value
— is about the future, not the past.
It is also increasingly about assets other than bricks
and mortar. Much of the value of companies today,
as seen by potential purchasers or investors, is based
on intangible assets such as brands, contracts and the
expertise of employees. That’s what often makes the
art of the deal so much like finding things in the dark.
CharteredBusinessValuatorStephenColeofToronto
says: “In some cases, particularly with emerging
technology companies or distressed companies whose
recent past has not been successful, it’s difficult to
determine their value — because value is all about
the future and there is no historical guide.”
Some CEOs, it seems, don’t know how to approach
that. A survey of Canadian executives, including
CEOs, CFOs and business owners, has found that
almost one-half are not aware of the term business
valuation.
The survey was conducted in the fall of 2003 by
The Canadian Institute of Chartered BusinessValuators
(CICBV). It revealed a certain amount of confusion
about values. Although senior executives certainly
know what they value in their personal and business
lives (see below), they are struggling with concepts
of asset value. They believe that it is easier to place
value on tangible rather than intangible assets, but
they also see that intangible assets do not have lesser
value, so they have a dilemma with respect to valuating
things that cannot be seen.
“The valuation of something that can’t be seen is
very subjective,” says Carl Merton, a senior manager
with KPMG LLP in Windsor, Ontario, and chair of
the CICBV’s Communications Committee.
“If I buy a building for $1 million, I can show that
on my financial statements, but if I hire an employee
who is brilliant and helps me to build better products
for my customers, then how do I record that as an
asset on my books? I can’t, because of the historical cost
basis of accounting.”
“Many CEOs are aware of the problem, but not of
the solution,” Merton says. “They are not aware of
Chartered Business Valuators and how we can help
with this dilemma.”
Chartered Business Valuators, or CBVs, have been
recognized as distinct professionals since 1971, when
federal taxes were imposed on the sale of capital assets.
The CICBV — now the largest valuation organization
in Canada, with more than 1,000 members — was
formed to train and guide people who could value assets
according to recognized standards and methodologies.
A professional valuator gains the CBV designation
only by taking and passing a rigorous set of courses
and exams, gaining practical experience in the field of
business valuation, being judged by peers as qualified,
and adhering to the Code of Ethics and Practice
Standards of the CICBV.
“The distinguishing qualification of a CBV is
expertise in determining a likely asking price to be
expected in the market for an asset — the value,”
says Donald Spence, a past president of the CICBV
and a financial advisory services partner with BDO
Dunwoody LLP in Kelowna, BC.
“Theskillsetgainedthroughexperienceandtraining
puts a CBV in a position to identify the value drivers
in any business. From a CEO’s perspective, that is
important because it is his or her task to increase the
value of a business.”
The corporate status of CBVs is rising. Since 2000,
thedot-combustandrevelationsofcorporateaccounting
malpractices have made executives and investors
more careful about the value of assets. New accounting
standards, too, have raised the importance of business
valuations. But a major reason why CBVs are more
frequently called upon as strategic advisers is that
they help companies make better decisions.
Stephen Cole, managing partner of Cole Valuation
Partners Limited, says the advice of a CBV can keep
busy executives “grounded.”As an example, his firm
recently provided advice to a publicly traded company
that was considering buying a privately held technology
firm. Cole recommended against paying a lump sum
cash price for the company, since its value relied
almost entirely on intangible assets and could not be
accurately estimated. Instead, the client followed
Cole’s advice to “drip-feed” the target — that is, to
obtain an option to purchase in exchange for lending
money to the firm. After a year of acting as a lender,
during which time the public company gained a
thorough understanding of the technology firm and
conducted due diligence, it completed the acquisition
on 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.
ACBVcanhelpthemkeepvalueperspectivesinmind.”
CBVs across the country report that their clients
are now seeking their advice early in the process of
making major decisions. Sometimes the result is that
a proposed transaction is cancelled. In Montreal,
Denis Labrèche, senior vice president of Ernst &Young
Corporate Finance Inc., recalls several incidents in
which clients took his advice to walk away from
proposed acquisitions of technology companies.
“With our rational approach to value, we avoided
horror stories,” Labrèche says.
Tom Strezos in Toronto can claim the same kind
Experts Worth Knowing
What CEOs
Don’t Know About Value

4. ADVERTISING SUPPLEMENT
4 CHARTERED BUSINESS VALUATORS
of satisfaction. He leads the valuation and litigation
support group at Mintz & Partners. A few months
ago, a client was interested in purchasing a company
in the health-care industry. But the Mintz valuation
team found that the target company’s stated value
was 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 company
eventually went bankrupt, and our client almost
bought them for $8 million!”
In another instance, involving a lawsuit, a Mintz
client was suing a former partner who had left the
firm and taken a contract with him, contrary to a
non-compete agreement. The client estimated the
value of the loss at up to $100,000.
Strezos says: “They used a net-income approach
but we used a contribution-margin approach — sales
less variable expenses. We worked with their lawyer
to develop a true understanding of the losses, and
put together a report that the company had in fact
lost more than $750,000.”
Such discrepancies can be very confusing. What
causes them? It’s not necessarily a matter of one
party being right and the other wrong. Perspectives
vary; market conditions change. CBVs are the first to
admit that valuation is an art, not a science.The artistry
of the CBV, however, is recognized and acknowledged
by the legal system.
“We’ve been trained to establish value,” Denis
Labrèche points out. “We have various methodologies;
we don’t look at a company only one way, because
there are different ways to evaluate a business. But that’s
our specialty. Others do it only on a part-time basis.
“What CEOs don’t know very much is that there
is only one professional body that is recognized in
Canada by the courts to do business valuations, and
that isThe Canadian Institute of Chartered Business
Valuators.”
Buying and
Selling a Business
Businesses of all sizes rely on CBVs to provide expert
valuations for many kinds of business transactions.
Often these involve the sale or transfer of a business
by 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 their
businesses to support their retirement? Part of the
answer, as every CBV knows, will probably depend on
things that the CEO may not have thought about.
How marketable is the business? Are its financial
statements and management information systems
up to date? What is the future value of its contracts
and other intangible assets? And what is the growth
potential of its market?
Such questions, and many more, are sometimes
outside of the owner’s comfort zone. Many entrepreneurs
take great pride in their businesses, especially the
physical premises they have built.
“A prospective seller often looks at the bricks and
mortar, but the true value of the business is based on the
profit 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 like
a son. What a CBV can do is to take the emotion
out of the sale, understand the buyer’s perspective
and bring a financial rationale to the process.”
Chartered BusinessValuators
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 business
value, but a Chartered Business Valuator (CBV) will always provide
the 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 financial
issues, the expert insights of a CBV are worth knowing.
For more information about The Canadian Institute of Chartered
Business Valuators and how a CBV can help you, please visit us at:
www.businessvaluators.com
or call 416 204-3396
Chartered Business Valuators.
Experts Worth Knowing.

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CHARTERED BUSINESS VALUATORS 5
Donald Spence, who has written a book for
BDO Dunwoody called Selling your Business For
What It IsWorth, says that perceptions of buyers and
sellers can sometimes be opposites. What an entre-
preneur might see as a strength, such as his or her
own decision-making ability, might be viewed as a
weakness by a buyer looking to the future.
“I did a valuation of a steel-fabrication business
in BC about seven years ago, for an owner who was
buying out a shareholder,” Spence recalls.
“The valuation highlighted many weaknesses in
the business, as well as positives. One negative was its
absolute dependency on the owner to do everything.
That was a significant limiting factor in the growth
of 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 management
team, including a sales manager and a plant manager.
Other things being equal, his company is of higher
value today than it was seven years ago, because of
the management depth.”
Similar kinds of issues come into play when busi-
nesses are passed to a second generation within a
family.There’s the added complication that the founder
wants to realize enough value from the business to
meet the goals of both retirement and estate planning.
Business owners in such circumstances often “freeze”
the value of their estates. That is, they will exchange
their common shares for preferred shares, with a value
fixed at a certain date. On death, their estates will
be taxed only on the value of those preferred shares.
Any additional value that is added to the company
after the valuation date is allocated to the common
shares that are issued to the sons or daughters who
take over the business.
Sounds good — but what is the underlying value
of the business upon which the estate freeze is based?
“CBVs can help in structuring the estate plan
and determining the appropriate values,” says Farley
Cohen, senior principal in theToronto office of Kroll
LindquistAvey. “We can be a very productive part of
the team, working with tax counsel, the estate lawyers
and the parties themselves.”
Another important aspect of succession planning
is to have an insurance plan that helps cover estate
taxes at death. CBVs can help in determining how
much tax there is going to be, and how much insurance
is necessary without being excessive.
Cohen, who is also head of the Canadian valuation
services group of Kroll Inc., says that too many CEOs
of family businesses don’t know the importance of
valuing their corporate assets before succession takes
place.
“A lot of people don’t deal with this at all. If they
did, there would be fewer family feuds. If people start
planning early, and put succession plans in place
properly ahead of time, things can be a lot smoother.”
FairValue Reporting
Businesses large and small are subject to more scrutiny
than ever. Publicly traded companies need to take
particular care with their financial reporting, especially
regarding acquisitions. The rules have changed, and
the expertise of a CBV is often required to see that
new rules are followed. A CEO who doesn’t know
this could steer into trouble.
Whereas, in the past, two senior executives meeting
to plan a business combination might calculate asset
values on the back of a napkin, now they are subject to
Experts Worth Knowing
FAIR VALUE AND THE
ANNUAL IMPAIRMENT TEST FOR
GOODWILL & OTHER INTANGIBLES
Since 1979, our practice has been devoted exclusively to business
valuation and litigation support. We act for accounting and
law firms, private businesses and multinational corporations
across the country. We are also valuation advisors to federal
and provincial governments and their agencies.
Our Chartered Business Valuators assist management, auditors
and corporate boards by valuing Goodwill, Intellectual Property
and other Intangible Assets for the Annual Impairment Test
and 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 Canadian
and 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 Canadian
Business Valuations (Carswell) and Financial Litigation:
Quantifying Business Damages and Values (CICA), as well
as our numerous in-depth articles, chapters and conference
papers published on both sides of the border.
WISE, BLACKMAN LLP
B U S I N E S S VA L U AT O R S • F O R E N S I C A C C O U N TA N T S
The Royal Bank of Canada Building
1 Place Ville Marie, 34th Floor
Montreal H3B 3N6
(514) 875-8100
w w w. w i s e b l a c k m a n . c o m

6. ADVERTISING SUPPLEMENT
6 CHARTERED BUSINESS VALUATORS
something called fair value within financial reporting.
In 2001, theAccounting Standards Board in Canada
introduced accounting and financial reporting standards
affecting intangibles and goodwill acquired in the past
and future. Under these standards, when companies
acquire a business, the purchase price must be allocated
for financial reporting purposes to intangible assets
and the residual attributed to “goodwill”. This
allocation requires the assessment of the fair value of
acquired 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 to
investors.
Jay Patel, vice president of Ernst &Young Corporate
Finance Inc. in Toronto, notes: “Every corporation,
public or private, has shareholders whose main interest
is in understanding financial performance. In a public
corporation, shareholders are removed from the
operations, so the critical piece of information they
rely on is financial statements. In private companies,
the major shareholder is a manager, but still needs
diligently prepared financial information.”
Why should the CEO or CFO consider using a
CBV 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 Canada
and the United States that back them up.
Richard Wise, a CBV from Montreal who is a
past president of the CICBV, points out: “The new
rules require that the fair values of the intangible
assets be measured and disclosed. You now have full
disclosure, which helps someone understand and
properly interpret a financial statement. Otherwise,
if everything is buried in goodwill, you don’t know
its true value.”
Wise is managing partner of Wise, Blackman, a
Montreal-based firm of business valuators and forensic
accountants. He, like others in the valuation and
accounting professions, is watching the concept of
fair value become more and more entrenched.
Today, the standards require that assets obtained
in a business acquisition be evaluated annually, at
least, to ascertain whether their fair value exceeds the
amount paid. If so, the value of those assets must be
written down on financial statements. Fair-value
accounting is also required for all assets of a company
emerging from bankruptcy.
Tomorrow, the same standards may be applied on
a broader scale in the interests of transparency of
financial reporting. There is growing recognition that
balance sheets do not account for the value of corporate
assets built up internally over time, such as brands and
patents.Task forces of accounting regulatory bodies in
North America and Europe have begun to discuss
whether to require companies to prepare financial state-
ments based not on historical costs, but on fair values.
Anysuchchangecouldtakeyears,butthediscussions
nevertheless point to an increasingly important role
for business valuators who can calculate current values
and the worth of intangible assets.
As Wise points out: “A CBV has undergone a very
rigid study program and gained practical experience,
and can give tremendous input in dealing with these
issues. It’s beyond the ability of the general-practitioner
accountant or the internal accountant of the company,
or the controller or the CFO, unless that person is
trained and accredited as a CBV.”
Chartered BusinessValuators
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the time
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short
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reports.
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CHARTERED BUSINESS VALUATORS 7
Stock Options
CBVs have recently become more involved in another
hot-button topic in executive suites: granting stock
options.
In the dot-com boom days, such options were
granted routinely as compensation. Employees and
others were granted options to buy corporate stock at
a fixed price. They would wait until the stock rose
in the market, then exercise their options and sell the
shares at a profit.
The problem was the options were typically not
shown as an expense on the company’s financial state-
ments and the true cost of these incentives to the
business was often not given an appropriate level of
consideration by management before the options were
granted. Exacerbating the problem, the whole area
of stock options is not well understood by investors
and other readers of financial statements.
The tide is turning. In the same spirit of transparency
that inspired changes in fair-value reporting,
accounting bodies such as the Canadian Institute
of Chartered Accountants (CICA) have provided
recommendations (in the form of GenerallyAccepted
Accounting Principles) stipulating that when amounts
paid by a business as compensation (for example, to
a supplier) takes the form of options “an asset, cost
or sales discount should be recognized… as if the
enterprise had paid cash… instead of paying with or
using the equity instruments”. In other words, the
cost of that option is to be reflected in its financial
statements in the period in which the cost is incurred.
The CICA has required since January 2002 that
the cost of such options be reported based on fair value,
which it defines as the “amount of the consideration
that would be agreed upon in an arm’s length trans-
action between knowledgeable, willing parties who
are under no compulsion to transact.”
People in corner offices have a challenge to figure
out what that means, exactly. Some have stopped issuing
stock options. For others, who still see them as an
important compensation tool, Chartered Business
Valuator Errol Soriano has some advice.
“Stock options granted to employees or others have
a cost not unlike other expenses the business incurs.
More and more, management is being held to account
for the method by which it distributes the business’
equity.”
“Any time you are dealing with a significant dollar
amount of compensation in the form of stock options,
it would be prudent to have a rigorous process to
determine the value of the options before embarking
on what can be an expensive compensation program.
Factors to consider in determining the fair value of
options are case specific and the analysis should
include quantitative valuation techniques.”
The process is not simple.The fair value of a stock
option is subject to many variables, including, among
many others, the likely future performance (volatility)
of the stock and the future performance requirements
necessary to satisfy vesting provisions.
The section of the CICA Handbook that deals
with stock options covers 48 pages of single-spaced
text. Better call in a CBV.
NationalValue Survey
Just as CBVs are the authoritative voice for the value of
corporate assets, their national association is becoming
the authority for the values of corporate leaders.
This coming fall the CICBV will release the results
of its second annual survey of Canadian values. It will
compare those results with those found in 2003, when
the institute commissioned a survey of 650 business
executives, and an equal number of residential
respondents, to see what they value in life.
The survey, conducted by Oraclepoll Research,
found that 99 per cent of business people rated honesty
and integrity as an important or very important
attribute, compared with 98 per cent of the general
public.
“The survey showed that,
despite recent business contro-
versies, Canadian executives
and professionals place a very
high value on honesty and
integrity, and are also strongly
committed to family and
personal time,” says CICBV
President Christopher Lee, a
partner with Deloitte &Touche
in Calgary.
The survey series was
developed by DouglasArmour
of Armour Communications
inToronto, a Communications
adviser to the CICBV. He says
it revealed more confidence
among executives in their
personal values than in the
business values that they must
understand.
“It’s difficult for some
business people to wrap their
minds around intangible assets,
such as the value of a trade-
mark,” Armour says. “These
valuations can be fluid over
time, and business people in
particular tend to deal with the
here and now. Understandably,
they are very pragmatic in their
approach to business life.”
The CICBV hopes that, in
the interest of Canadian cor-
porate governance, such pragmatism will lead to the
realization that Chartered Business Valuators are
important sources of expertise for decision-makers,
andthattheirself-governinginstituteisanecessarybody
to provide professional accreditation and discipline.
Carl Merton, the CICBV’s Communications
Committee chair, says, “It’s important that Canadian
businesses understand the credibility that the Institute
and the CBV designation bring to the valuation
process.”
“Corporate values relate more and more to the
value of intangibles; our survey showed the need for
more recognition of a professional organization that
promotes education and understanding of how to
objectively 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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