Marek Panfil Chartered Business Valuator

Business Valuation Academy #2
a fellowship of people passionated about business valuation
Organizers: Department of Finance, Koźmiński University
• dr Marek Panfil
• Prof. Paweł Mielcarz

Marek Panfil, Ph.D.
A CBV Candidate
Kozminski University, Department
of Finance
marekpanfil.com
mpanfil@kozminski.edu.pl

Our goals:
• To promote the best standards in business valuation
• To collaborate with other educational institutions and
consulting firms providing research and advisory in
valuation
• To integrate students and alumni
• To promote Master Classes and continuing studies in
Corporate Finance, Value Based Management and Business
Valuation offered by ALK Department of Finance

Chartered Business Valuator (CBV)
Canadian Institute of CBV = > CBV Institute (in 2018)

Over the past 40 years, the business valuation profession has grown in Canada and the
CBV designation has become the most recognized credential for professional business
valuators in the country. Today, CBVs provide a broad range of business valuation
services to many communities
CICBV, CBV • The 1971 tax reform
• Mid-1970s — OSC Policy Statement related to
formal Valuation Reports
• Canada Business Corporations Act
• Provincial matrimonial law legislation and the
Federal Divorce Act
• Federal and various provincial expropriation Acts
• Changes in accounting and auditing standards
Source: Introductory Business Valuation, Level I, CICBV, Canada

The CICBV is the largest and most recognized business valuation organization in Canada.
The CICBV establishes the Practice Standards, educational requirements and ethical
guidelines that support and promote the integrity of the CBV designation for the benefit of
its more than 1,500 Members.
CICBV, CBV
• The CICBV was founded in 1971 by 28 valuation
professionals
• The taxation of capital gains in Canada began in
1971, creating the general need for business
valuation.
• The mandate of the CICBV is to promote the CBV
designation nationally and internationally, to design
and deliver the CBV education curriculum, and to
uphold the standards and ethics of the profession.

Many reasons of business valuation
Reasons of
Valuation
• Income tax transactions, Estate planning
• Structuring shareholder agreements and assisting in
shareholder disputes
• Minority shareholder actions, Business restructuring
• Matrimonial law matters
• Employee share ownership planning and stock option
issuances
• Purchase price allocations
• Goodwill impairment testing
• Mergers, acquisitions, and divestitures
• Expropriation, Quantification of economic losses
• Going public/going private transactions
• Transfer pricing, Fairness opinions

CICBV Practice Standards
Standards

Open market
transactions
Open market transactions are actual acquisitions and divestitures of
business interests that are completed after exposure to the open market.
Here are several characteristics of open market transactions:
• The ultimate objective of a value analysis in the open market is the
determination of price.
• The parties to a transaction each perform their own research and
analyses, and then engage in negotiation. It is through negotiation that
the parties’ initial value assessments eventually reach the final
transaction price.
• Value assessments for purposes of open market transactions are made
at a current date.
Open Market Transactions
vs. Notional Market Valuations

Notional
market
transactions
Notional market valuations are used in situations where value must
be determined without exposing the business interest for sale on
the open market (i.e., value is determined theoretically). Examples
of scenarios which would call for a notational market valuation
include the following:
• In a non-arm’s length transaction, such as the transfer of shares
to a family member (succession)
• In the determination of an equalization payment in a marital
dispute.
• In the determination of the loss of business value in a litigation
matter.

Notional
market
transactions
• It is this notional market that is defined by valuation
theory.
• Its definition implies a notional market that mirrors
open market transactions which are based on rational
investor behaviour.
• Notional market value determinations can be made
either at a current date or at some significant historic
date.
• Generally, valuators determine value in the context of a
notional market.

Fair Market Value
FMV
The concept of “fair market value” is the cornerstone of business
valuation theory. While other value terms may occasionally be
relevant in specific circumstances, notional value determinations are
normally founded on the fair market value concept, possibly with
some modifications. The International Glossary of Business Valuation
Terms defines “fair market value” (FMV) as:
• 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 arm’s 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.

Price vs. value
The only true way to determine
the price achievable for a
business is to expose it to the
open market and
negotiate a transaction with
another party.
It is vital to recognize that there may be significant differences
between “price” in an open market and “value” in a notional market.
• Purchasers and vendors may have different knowledge,
negotiating abilities and financial strengths
• There are emotional considerations that may override objective
analysis and evidence
• All potential purchasers (such as special interest purchasers) may
not be identifiable
• A price may be struck as the result of forced or compulsive acts
on behalf of either the vendor or the Purchaser
• The price may not be all cash and instead, earn-outs or other
structures may be relied upon to bridge the price “gap” between
the vendor and the purchaser
Price vs. value

Special Interest Purchaser
Special
Interest
Purchaser
The valuator has a responsibility to attempt to identify special interest
purchasers. The approach to obtain such information may include:
• Researching the industry (i.e., a subject company’s customers,
competitors, and suppliers).
• Reviewing recent transactions in the industry.
• Asking shareholders/management if they know of any potential buyers.
• Asking executives of other corporations in the same industry (or
industry association representatives) if they know of any potential
buyers.
• Reviewing any previous offers to purchase the business.
• If the transaction has already occurred, understanding the rationale
behind it.

Commonly used value terms
Value terms
• Fair Market Value
• Fair Value
• Market Value (or Value in Exchange)
• Intrinsic Value (or Stand Alone Value)
• Value to Owner
• Book Value
• Adjusted Book Value
• Liquidation Value
• Net Realizable Value
• Replacement Value (New)
• Depreciated Replacement Cost
• Reproduction Value

The Seven Principles of Valuation
7 principles
1. Value is determined at a specific point in time. It is a
function only of facts known or knowable, and
forecasts made at that particular point in time.
2. Value is prospective. It is equivalent to the present value
of all future benefits anticipated to accrue
from ownership.
3. The market dictates the appropriate rate of return.
4. The higher the underlying net tangible asset value base
(measured in terms of both its going-concern
value, i.e., tangible asset backing, and its valuation date
liquidation value), the higher the going-concern value.

The Seven Principles of Valuation
7 principles
5. Where value is taken to be the present value of all future
benefits anticipated to accrue from ownership,
it may have two distinct components:
• Commercial (or transferable) value
AND/OR
• Non-commercial (or value-to-owner) value.
6. Value is influenced by liquidity.
7. The value of a minority interest may be worth less than a
value of a controlling interest where each is
viewed on a “per share” basis.

Going Concern vs. Liquidation Approach
Going concern
vs. liquidation
approach
If a business is a going concern, one of the following valuation
methods or techniques is then chosen:
• Adjusted net book value (asset-based approach)
• Capitalized cash flow (based on normalized historical cash
flows)
• Capitalized earnings (based on normalized historical earnings)
• Discounted cash flow (based on forecasted cash flows)
• Capitalized excess earnings/dual capitalization of earnings
And market-based approaches, including:
• Comparable public company multiples OR
• Comparable market transactions.
• History is used as a guide to determine the most likely future
results

Going Concern vs. Liquidation Approach
Going concern
vs. liquidation
approach
If a business is not a going-concern, then the liquidation
approach is selected. The liquidation approach
is an asset-based approach. The valuator must then decide
which of a forced liquidation or an orderly
liquidation method is applicable, given the business’
financial position, the state of its operations, and
other factors

CBV – mandatory and optional courses, MQE
Optional
courses (2)
1. Introductory Business Valuation
2. Intermediate Business Valuation
3. Advanced Business Valuation
4. Special Topics in Business Valuation
Mandatory
courses (4)
1. Private Investments
2. Litigation Support in Business Valuation
3. Corporate Finance
4. Valuation for Financial Reporting
Source: CICBV, Canada
Final Exam
Member Qualification Exam – can be passed only in
September

CBV Process - Prices
CBV Process (2019 prices) CAD Membership fees CAD
CBV-I 885
CBV-II 885 2018 Admission Fee 595
CBV-III 885
CBV-IV 885 2018 Annual Membership Fee 885
Optional 1 885
Optional 2 885
Annual Student Fee
Year 1 265
Year 2 265
MQE 1,370
2-3 books 350
Total 7,560$
Total 22,680 zł

Level I - Introductory Business Valuation
1. Introductory to Business and Securities Valuation (legislative
changes, role of the CBV, open market transactions, notional market valuations, special
interest purchasers, other value terms, seven principles of valuation, going concern vs.
liquidation)
2. Professional Practice Matters: the CICBV and Engagement
Management (the CICBV Code of Ethics and Practice Standards, Valuation
assignment)
3. Capitalization and Discount Rates (CoE or ROE, WACC, Enterprise Value,
Equity Value)
4. Income Based Approach to Value Determination (Capitalization of
Maintainable Earnings or Cash Flows, DCF, Rule of Thumb, Adjusted Present Value,
Intangible Asset / Goodwill derivation from en-bloc value, valuation of two or more
businesses within one corporate entity) Source: CICBV, Canada

Level II - Intermediate Business Valuation
1. Taxation issues for Valuation (Canadian Tax Principles, Forms of Business
Organization, Types of Income – business, property, gain; tax rates, tax assets, tax
liabilities incl. transfer pricing)
2. Comparable Company Multiples and Other Valuation
Concepts (common multiples used in practice, public company multiples,
precedent transaction multiples, analysing financial statements, asset-based
valuation approach: liquidation value, adjusted net book value, tangible asset
backing, risk measurement, real estate and equipment valuations)
1. Other key topics (majority positions and control, acquisition of control rules, sale
of assets vs. shares, the Canadian Business Corporations Act; minority positions,
discounts for illiquidity, portfolio discount, blockage discount, discounts for restricted
shares, quantifying for special purchaser premium, shareholder agreements)

Level III - Advanced Business Valuation
1. Valuation of various classes and shares (allocation of value, preferred shares, multiple classes
of common and preferred shares, rights and characteristics of preferred shares, public vs. private preferred shares)
2. Common Financial Instruments (debt instruments, lending agreements,
categories of debt and debt priority, bonds and debentures, valuation of bonds,
derivative instruments, binomial model approach, Monte Carlo Simulation, Real Options)
3. Valuing start-up, high-tech and financially distressed companies
4. IFRS 13 Fair Value Measurement and IFRS 3 Business Combinations
(IFRS 13- exit price, orderly transaction, market participants, highest and best use; IFRS 3 – the PPA,
Impairment Testing for Goodwill and Intangible Assets IAS 36, Valuation of Intangibles)
5. Contingent Consideration, Tax Loss Carry Forward, Real Property and
Equipment (Valuation of contingent consideration - Earns-out, undeducted scientific R+D expenditures,
undeducted investment tax credits, Real estate, Equipment Valuation)

Level IV – Special Topics
1. Law (Securities Regulations, Contracts, Torts, Valuation in Agreements, Impact of Legislation on Value,
Statutory rights and minority shareholders and creditors)
2. Corporate Reorganizations (transfer of property to a corporation - Section 85,
share capital reorganization – Section 86, Statutory Amalgamation – Section 87,
Winding-up of a Subsidiary – Subsections 88(1) and 88(2), Allowable Elections – Section 22)
3. The CBV as an Expert (overview of CICBV – by-Laws, Standards and Codes,
the Court System and the Litigation Process, the Canadian Judicial Process Related to Experts)
4.Quantification of Damages and Other Awards (Nature of Loss quantification, the concept of
financial loss in litigation, types of damage awards, establishing liability, damage quantification
for breaches of contract or tort, Interest Awards, Tax Treatment of damages and awards)
5. Other Topics (Family Law, Personal Injury, Wrongful Death, Wrongful Dismissal from Employment,
Public Company Issues – Going Public, Fairness Opinions, Earn-Outs, ESOPs ) Source: CICBV, Canada

Litigation Support in Business Valuation
1. The Engagement Process (Internal Procedures before Accepting an Engagement –
independence, objectivity and conflict of interest, setting of fees and contingency fees, the
engagement letter, etc. )
2. Torts and Personal Injury Damages (Personal Injury – pecuniary and non-
pecuniary losses, MVAs, loss of pension benefits, future care costs; Wrongful Death /
Personal Injury Fatalities, Contributory Fault)
3. Matrimonial Disputes (Family Law and the role of the CBV, Family Property Regimes
and Legislation, Issues Specific to Matrimonial Property Assignments, Methods of Divisions,
etc.)
4. Intellectual Property Damages (Patents, Copyrights, Trademarks, Trade Secrets)
5. Business Interruption – Insurance Claims and Expropriation
6. Construction Losses (the Nature of Construction Project, types of construction
contracts, types of claims) Source: CICBV, Canada

Private Investments
1. Private Investments Strategy (Methods of Investing, Key Asset Classes, Direct vs.
Indirect Investments, Investment Returns and Value Creation, Large Financial Investors )
2. Infrastructure Investments (Types, Key Characteristics, Value Creation through
Active Asset Management, General Risks, Market Risks, PPPs)
3. Private Equity Investments (Value Creation Strategies, Entry during Depressed
Market Conditions, Exit Strategy, Due Diligence, PE Performance Incentives )
4. Valuation of Private Investments (Infrastructure Investments, Private Equity
Investments, Selection of Appropriate Valuation Approach)
5. Market Multiples (EV/EBITDA)
6. Finance (Sources of Leverage, Bank Loans / Term Debt – high yield bonds, subordinated
debt / mezzanine debt, convertible debt)

Private Investments
7. Key Tax Considerations (Purchase of Assets vs. Shares)
8. Deal Bidding / Pricing Process (Auction Timeline – NDA, CIM, EOI, Detailed Due Diligence,
LOI, Exclusivity/Bidding Offer/Definitive Agreement, Close )
9. Purchase Agreement and Shareholder / Partner Rights (Purchase Price &
Adjustments and Transaction Description, Working Capital Adjustments, Representations & Warranties,
Shareholder / Partner Rights, )
10. Take-Private Transactions
11. Investment Returns and Benchmarks (IRR, Multiple – of - Money, Cash - on – Cash
Return, Management Fees )
12. Valuation for Financial Reporting (Policies and Guidelines, Accounting Standards and
Definitions, Valuation Guidance, Valuation Process)
13. Valuation Basis of Debt and Interest (Key Factors, Overall Reasonableness of the
Investment Valuation, Industry Practice and Guidelines – International PE and VC Valuation Guidelines )

Valuation for Financial Reporting
1. Introductions to Financial Reporting Standards (PPA, Impairment Testing for
Goodwill and Intangible Assets, Intangible Assets, Valuing for Reporting Purposes, Valuing Individual
Intangible Assets )
2. Purchase Price Allocations (Identify the Intangible Assets, Assess and Select Appropriate
Valuation Approaches, )
3. Investment Entities (Fair Value Measurement)
4. Impairment (Impairment Testing, Cash Generating Unit, How to test Goodwill Impairment,
Intangible Assets )
5. Role of CBV as an Expert on Audit Team (Independence and Objectivity of the
Valuator, Accounting and Regulatory Standards Applicable to Fair Value Accounting and the Use of
Valuator as an Expert, Engagement Notice )

Corporate Finance
1. Business Planning and Financial Modeling (Feasibility, Business Plan and the
Financing Proposal, Financial Forecasting and Modeling, )
2. Structuring (Positioning the business for financing, measuring financing needs, assessing credit
capacity, structuring)
3. Raising Capital (Selecting Market Instruments – Debt, Equity, Quasi-Equity: Convertible
Instruments, Options, Rights and Warrants; Valuation Considerations, Ownerships Structure
Considerations, Model Investment Return, Developing Marketing Documents, Identifying and
Approaching Investors; Acquisitions, LBOs, Mergers, Divestitures, )
4. Negotiations and Loan Agreements (Negotiations with Providers, Legal Agreements,
After the Deal Considerations )

The aplication of FV under IFRS
is extensive. The CBV course
focuses on:
• business combinations and
the valuation of intangibles
• Impairment of goodwill and
intangible assets
• Valuation of investment
entities

Valuation for Financial Reporting

Valuation for financial reporting – Exam July 2018

Valuation for
financial reporting
– Exam July 2018

Valuation for financial
reporting – Exam July 2018
Royalty avoided
Terminal Multiple
TAB = Tax Amortization Benefit
CCA = Capital Cost Allowance
CCA is a yearly deduction in the Canadian income tax
code that can be claimed on depreciable assets.
Generally, the CCA can be claimed on the assets that
are expected to last for several years, such as
buildings, plant and equipment, or machinery, as well
as additions and improvements to such assets. CCA
does not apply to expenses such as business supplies.
CCA is generally calculated based on the declining
balance method.

- Solution
TAB refers to the present value of income tax
savings resulting from the tax
deduction generated by the amortization of
an intangible asset. When the purchaser of an
intangible asset is allowed to amortize the price
of the asset as an expense for tax purposes, the
value of the asset is enhanced by this tax
amortization benefit. Specifically, the fair market
value of the asset is increased by the present
value of the future tax savings derived from the
tax amortization of the asset. The present value
of these savings is to be estimated and included
as a part of the fair market value when valuing an
intangible asset.

- Solution
Contributory Assets Charges – they come
from the concept that other assets, both
tangible and intangible, contribute to the
cash flow of the intangible asset.
Hypothetical rental/lease charges for these
enabling assets are deducted from the
after-tax cash flows of the intangible asset.
Common contributory charges include
those for working capital, fixed assets,
assembled workforce, and other identified
intangibles, like brands, technology, non-
competes, etc.
Capital Cost Allowance

- Solution
CACs = Contributory Assets Charges

- Solution

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marekpanfil.com

Marek Panfil Chartered Business Valuator

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