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.
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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 world’s 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), Canada’s 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
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M&A International™ – 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.
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Disclaimer
This material is for educational purposes only. It deals with
technical matters which have broad application and may not be
applicable to a particular set of circumstances and facts. As well,
the course material and references contained therein reflect laws
and practices which are subject to change. For these reasons, the
course material should not be relied upon as a substitute for
specialized advice in connection with any particular matter.
Although the course material has been carefully prepared, the
author does not accept any legal responsibility for its contents or for
any consequences arising from its use.
© Howard E. Johnson, 2013
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Primary Business Valuation Issues
•Technical errors
•Unreasonable assumptions
•Internal inconsistency
•Inadequate valuation report
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Technical Errors
•Simple math errors
•Normalization adjustments
•Missing the balance sheet
•The hidden value of real estate
•Cyclicality considerations
•Foreign exchange
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Valuation Approach
•Multiple of EBITDA
•Discounted cash flow
•Use of public company multiples
•Reliance on industry transactions
•Rules of thumb
•Reliance on asset values
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Rates of Return / valuation multiples
•Pretax vs. after-tax
•Inclusion or exclusion of inflation
•Type of return (WACC, ROE, etc.)
•Double counting of risks
•Financial leverage considerations
•Long term growth rates
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Minority Discounts
•Highly subjective
•Need to know the starting point
•Liquidity issues
•Control / influence issues
•Avoid double-counting
•Shareholder agreement is key
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Unreasonable Assumptions
•Industry conditions / forecasts
•Financial projections
•Growth rates vs. market
•Profit levels vs. market
•Capital expenditures
•Working capital requirements
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Internal Inconsistency
•Within financial projections
•Revenues vs. costs
•Capacity limitations
•Between projections and rates of return
•Between facts and projections
•Between facts and rates of return
•Previous transactions
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Valuation Report Problems
•Calculation vs. Estimate vs. Comprehensive
•Independence of expert
•Qualifications of expert
•Inadequate business and industry analysis
•Incomplete / incorrect facts
•Lack of third party data / contacts
•Scope limitations and qualifications
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More Valuation Report Problems
•Reasons underlying historical results
•Changing business / industry / economic
conditions
•No sensitivity analysis
•Unrealistic conclusions
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Contentious Valuation Issues
•Definition of fair market value
•Reliance on hindsight
•Valuation date determination
•Minority discounts
•Use of critique reports
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Beware
•Anything offshore
•Foreign entities
•Donation schemes
•Acquisitions for tax losses
•Major reorganizations
•Large transactions
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Protective Measures
•Contemporaneous valuation
•Approach – verbal then written
•Maintain privilege
•Do not bias the expert
•Ensure independence in both fact & appearance
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Resources
Visit www.Veracap.com for a variety of
articles, publications and other resources
that may be of use
M&A International™ – the world's leading M&A alliance