The document discusses common errors in business valuations and how to avoid them. It outlines technical errors, unreasonable assumptions, internal inconsistencies, and inadequate valuation reports as primary issues. It also provides examples of specific errors like math mistakes, inappropriate growth rates, and inconsistencies between projections and rates of return. The document advises seeking independent and qualified experts, contemporaneous valuations, and maintaining privilege to protect against problems.
Commons Errors in Business Valuation and How to Avoid Them
1. M&A Internationalā¢ ā the world's leading M&A alliance
Common Errors in Business Valuation
and How to Avoid Them
April 8, 2013
Howard E. Johnson,
MBA, FCPA, FCA, FCMA, CBV, CPA, CFA, ASA, CF, C.Dir
Veracap M&A International Inc.
1
2. M&A Internationalā¢ ā the world's leading M&A alliance
About Veracap M&A International Inc.
Veracap provides advice and transaction support to business
owners and executives relating to acquisitions, divestitures,
financing and shareholder value initiatives. As a member of
M&A International, Veracap forms part of the worldās leading
organization of M&A advisors, with over 600 professionals in 40
countries around the world. Over the past 5 years, the
members of M&A International have completed 1400
transactions worth US$75 billion.
Veracap is an affiliate of Campbell Valuation Partners Limited
(CVPL), Canadaās longest established independent business
valuation firm. CVPL has acted for mid-sized and large public
and private corporations, as well as regulatory authorities and
the Canada Revenue Agency.
www.veracap.com
2
3. M&A Internationalā¢ ā the world's leading M&A alliance
Speaker
Howard E. Johnson
MBA, FCPA, FCA, FCMA, CBV, CPA, CFA, ASA, C.Dir
Managing Director, Veracap M&A International Inc.
(416) 597-4500; hjohnson@veracap.com
Howard is a Managing Director of Veracap M&A International
and its affiliate, Campbell Valuation Partners Limited. He
advises business owners and executives on business
valuation, acquisitions, divestitures, financing and
shareholder value initiatives. Howard is the author of six
books on the subjects of business valuation and corporate
finance, and has acted as an expert witness on valuation
matters before the courts.
3
5. M&A Internationalā¢ ā the world's leading M&A alliance
Primary Business Valuation Issues
ā¢Technical errors
ā¢Unreasonable assumptions
ā¢Internal inconsistency
ā¢Inadequate valuation report
5
6. M&A Internationalā¢ ā the world's leading M&A alliance
Technical Errors
ā¢Simple math errors
ā¢Normalization adjustments
ā¢Missing the balance sheet
ā¢The hidden value of real estate
ā¢Cyclicality considerations
ā¢Foreign exchange
6
7. M&A Internationalā¢ ā the world's leading M&A alliance
Valuation Approach
ā¢Multiple of EBITDA
ā¢Discounted cash flow
ā¢Use of public company multiples
ā¢Reliance on industry transactions
ā¢Rules of thumb
ā¢Reliance on asset values
7
8. M&A Internationalā¢ ā the world's leading M&A alliance
Rates of Return / valuation multiples
ā¢Pretax vs. after-tax
ā¢Inclusion or exclusion of inflation
ā¢Type of return (WACC, ROE, etc.)
ā¢Double counting of risks
ā¢Financial leverage considerations
ā¢Long term growth rates
8
9. M&A Internationalā¢ ā the world's leading M&A alliance
Minority Discounts
ā¢Highly subjective
ā¢Need to know the starting point
ā¢Liquidity issues
ā¢Control / influence issues
ā¢Avoid double-counting
ā¢Shareholder agreement is key
9
10. M&A Internationalā¢ ā the world's leading M&A alliance
Unreasonable Assumptions
ā¢Industry conditions / forecasts
ā¢Financial projections
ā¢Growth rates vs. market
ā¢Profit levels vs. market
ā¢Capital expenditures
ā¢Working capital requirements
10
11. M&A Internationalā¢ ā the world's leading M&A alliance
Internal Inconsistency
ā¢Within financial projections
ā¢Revenues vs. costs
ā¢Capacity limitations
ā¢Between projections and rates of return
ā¢Between facts and projections
ā¢Between facts and rates of return
ā¢Previous transactions
11
12. M&A Internationalā¢ ā the world's leading M&A alliance
Valuation Report Problems
ā¢Calculation vs. Estimate vs. Comprehensive
ā¢Independence of expert
ā¢Qualifications of expert
ā¢Inadequate business and industry analysis
ā¢Incomplete / incorrect facts
ā¢Lack of third party data / contacts
ā¢Scope limitations and qualifications
12
13. M&A Internationalā¢ ā the world's leading M&A alliance
More Valuation Report Problems
ā¢Reasons underlying historical results
ā¢Changing business / industry / economic
conditions
ā¢No sensitivity analysis
ā¢Unrealistic conclusions
13
14. M&A Internationalā¢ ā the world's leading M&A alliance
Contentious Valuation Issues
ā¢Definition of fair market value
ā¢Reliance on hindsight
ā¢Valuation date determination
ā¢Minority discounts
ā¢Use of critique reports
14
15. M&A Internationalā¢ ā the world's leading M&A alliance
Beware
ā¢Anything offshore
ā¢Foreign entities
ā¢Donation schemes
ā¢Acquisitions for tax losses
ā¢Major reorganizations
ā¢Large transactions
15
16. M&A Internationalā¢ ā the world's leading M&A alliance
Protective Measures
ā¢Contemporaneous valuation
ā¢Approach ā verbal then written
ā¢Maintain privilege
ā¢Do not bias the expert
ā¢Ensure independence in both fact & appearance
16
17. M&A Internationalā¢ ā the world's leading M&A alliance
Visit www.Veracap.com for a variety of
articles, publications and other resources
that may be of use
Resources