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

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

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

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

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

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.

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

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

Career Paths CBVs Work in… Accounting firms Public and private companies The investment community Financial institutions Governments and regulatory agencies And as… Independent specialists

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)

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

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

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

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)

Seller’s Projections Often optimistic and can be unrealistic Assumptions must be scrutinized and challenged

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)?

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

Other Company Risk (Internal & External) Impact of “Size” on Risk DEVELOPMENT OF DISCOUNT OR CAPITALIZATION RATE APPLYING 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 Risk-Free Rate 2.8

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

Financial Reporting Purposes FAIR VALUE 2001 CPA Canada 2011 IFRS

Valuation Methods Accepted by Delaware Chancery Court 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

DCF Method 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

Professor Aswath Damodaran, Ph Professor Aswath Damodaran, Ph.D Stern School of Business New York University - 22 -

Equity Risk Premium Component of Capitalization/Discount Rate “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)

Professor Aswath Damodaran “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.”

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

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

U.S. Valuation Authorities (Examples)

Canadian Business Valuation Books 1972 2010 1990 2001 Current Current - 28 -

ACCOUNTING › CONSULTING › TAX ACCOUNTING › CONSULTING › TAX Questions and Answers Richard M. Wise FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA, CA•IFA, CFF Partner Suite 2300 1155 René Lévesque Blvd. West Montréal, QC H3B 2K2 Telephone: 514.861.6523 Fax: 514.861.9446 Toll-Free: 1.888.861.9724 E-mail: richard.wise@mnp.ca mnp.ca Catherine Tremblay CPA, CA, CBV, ASA, CFF Partner Suite 2300 1155 René Lévesque Blvd. West Montréal, QC H3B 2K2 Telephone: 514.228.7772 Fax: 514.861.9446 Toll-Free: 1.888.861.9724 E-mail: catherine.tremblay@mnp.ca mnp.ca ACCOUNTING › CONSULTING › TAX ACCOUNTING › CONSULTING › TAX