1. 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

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

3. 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

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

5. 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

6. 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.

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

8. 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

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

10. 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)

11. 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

12. 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

13. 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

14. 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)

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

16. 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)?

17. 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

18. 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

19. 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

20. Financial Reporting Purposes
FAIR VALUE
CPA Canada
IFRS

21. 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

22. 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

23. Professor Aswath Damodaran, Ph
Professor Aswath Damodaran, Ph.D Stern School of Business New York University
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24. 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)

25. 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.”

26. 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

27. 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

28. U.S. Valuation Authorities (Examples)

29. Canadian Business Valuation Books
1972
2010
1990
2001
Current
Current
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31. 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:
Fax:
Toll-Free:
mnp.ca
Catherine Tremblay
CPA, CA, CBV, ASA, CFF
Partner
Suite 2300
1155 René Lévesque Blvd. West
Montréal, QC H3B 2K2
Telephone:
Fax:
Toll-Free:
mnp.ca
ACCOUNTING › CONSULTING › TAX
ACCOUNTING › CONSULTING › TAX