FAQ

The cost of a business valuation ultimately depends on the complexity of what is being valued and why it is being valued. The answer to these questions generally dictate which ‘type’ of valuation report is required as the CBV Institute identifies three types of business valuation reports: Calculation, Estimate and Comprehensive. The type of report influences the scope of work and time required to complete the engagement with Calculation reports generally taking a few weeks to complete while Comprehensive reports can take months.

The cost of a commercial real estate appraisal can vary significantly depending on the asset class, location, size and complexity of the property. The cost of a relatively simple commercial property appraisal will be lower than a larger, more complex commercial property, or one located in a remote location.

The complexity of the business and the intended use of the appraisal report are factors considered when selecting the type of valuation report. Calculation reports involving relatively simple businesses generally take a few weeks to complete while Estimate or Comprehensive reports involving complex businesses can take several weeks or months.

The size, location, and complexity of the property and the intended use of the appraisal report are major factors that influence the time required to complete a commercial property appraisal. Generally speaking, smaller engagements can be completed in under 2 weeks while more complex assignments generally take 4 weeks or longer.

There are no provincial licenses required to practice business valuation; however, the intended use of a business valuation should guide who you rely upon to value your business interest(s). An understanding of valuation theory and methodologies, a solid grasp of accounting and finance, specialized experience, and a demonstrated commitment to ethics and professional standards makes a CBV uniquely qualified to value business interest(s). CBV’s are widely recognized by professional bodies, the business community, the courts, and Canada Revenue Agency as experts in the field of business valuation.

There are two provinces in Canada that require anyone practicing real estate appraisal to carry a valid license: Nova Scotia and New Brunswick. Although the remaining provinces and territories do not require real estate appraisers to carry a license, users of appraisal reports in these provinces will generally require the appraiser to be a member of a recognized professional organization, most notably the Appraisal Institute of Canada (AIC).

Commercial properties include office, retail, industrial and special-use properties although residential buildings containing five or more units are also considered commercial property in the context of real estate appraisal. Commercial properties cannot be valued by a residential appraiser although commercial appraisers can, if they choose, value residential properties.

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It depends. We recommend business owners retain the services of a Chartered Professional Accountant (CPA) to help them prepare financial statements, tax returns and related financial reporting; however, very few CPA’s have specialized training in business valuations. In other words, a qualified accountant such as a CPA is unlikely to have the experience and education needed to value your business. Moreover, depending on the intended use of the valuation, a valuation completed by a company’s accountant may appear to lack independence, a critical element in preparing an independent valuation report.

A Realtor can offer an estimated market value of your property when creating a listing contract (seller brokerage agreement), however, this is not a professional appraisal. In Alberta, RECA states that Realtor providing an estimated value of property for the purposes of a trade in real estate must also ensure the following:

“The report you are given must include a statement indicating:

– the purpose of the report

– that a real estate appraiser with a licence from the Real Estate Council of Alberta (RECA) did NOT prepare this report

– that it is NOT a real estate appraisal report

– that no one should refer to or rely on the report as an appraisal report

– that the report does not comply with RECA appraisal standards

– that the report must not be used for financing, civil proceedings, income tax purposes, or financial reporting purposes”

Value must always be viewed as at a specific point in time – this is a fundamental concept that applies to both real estate appraisal and business valuation. In other words, value is not stagnant, many factors affect it, both internal and external. The length of time a value conclusion can be relied upon depends on the intended use of the valuation, and the degree to which internal and external factors have influenced value since the effective date of valuation.

There are many internal and external factors that must be considered when completing a business valuation. In addition to reviewing financial, legal, and operational documentation specific to the company, the valuator may also review industry data or other sources of external information. Clients will receive an itemized Document Request List upon commencement of the engagement.

The valuation of a commercial property or privately-held business interest is much more complex than simply ‘crunching numbers’. Every asset has unique risks and opportunities and without conducting the requisite research and analysis it is hazardous to assume an opinion of value based on a “ballpark” estimate is accurate. Notwithstanding, some circumstances do not call for, or allow, the level of analysis needed to prepare a formal business valuation. In these circumstances, our consulting/advisory services are uniquely tailored to meet the needs and constraints of the client.

Yes, we can provide an opinion as to the value lost through personal injury or business interruption by ensuring these calculations are performed in accordance with industry best practice.

It would be extremely rare, and coincidental, for the market value of a company at any specific point in time to equal to its book value. Financial statements are based on specific rules for recording transactions and related financial activities of a business. As a result, economic factors external to the financial statements may not be accurately reflected in the company’s reported book value. More importantly, a company’s financial statements reflect its historical performance, not its future prospects.

The credentials and experience of the report writer, the scope of work, and adherence to professional reporting standards are all factors that should be considered when reviewing a valuation report. Members of the AIC and CBV Institute are recognized as experts in their respective fields and as a result, these professionals are often retained to critique valuation reports completed by others to ensure consistency with best practices and methodologies.

We appraise multi-family residential properties although we do not appraise single family homes and/or individual residential condominium units.

We have relationships with equipment valuation specialists to ensure that equipment valuations, if needed, are consistent with the requirements of the overarching business valuation or real estate appraisal.

It is common to hear of a “Rule of Thumb” for a specific industry or asset class. Although these rules can narrow the range of reasonable investment alternatives, it would be hazardous to rely on this preliminary analysis tool to determine the final value of a business or property. Asset-specific attributes and characteristics can easily result in achievable market value estimates that are, justifiably, well beyond the typical range indicated by a particular Rule of Thumb. As an example, consider two identical franchised restaurants valued using a Rule of Thumb of 2.0x revenue. Presumably, these franchises would have the same value; however, further analysis may discover that one of the restaurants has a long-term, below-market lease. This would in all likelihood result in a higher valuation as the purchaser of this business would benefit from lower overhead, resulting in superior profitability. A professional valuation will consider multiple approaches to value, thereby identifying issues that may go unnoticed when applying a simple rule of thumb.

Value is always considered as at a specific point in time. Depending on the intended use of the valuation report, it may be beneficial to wait for a certain event (i.e., completion of financial statements, attainment of permits or licenses, etc.) before having the valuation report completed. We work closely with our clients to understand their unique needs and requirements, thereby avoiding potential issues related to ‘stale-dated’ valuation reports.

The first step in valuing a business is to determine if the business is a going-concern. Once this determination is made, there are three generally accepted valuation methodologies: 1) Income Approach; 2) Asset Approach; and 3) Market Approach.

The first step in valuing a property is to determine the property’s highest and best use. Once this determination is made, there are three generally accepted valuation methodologies: 1) Income Approach; 2) Cost Approach; and 3) Direct Comparison Approach.

Expropriation refers to the “taking” of “land” without the consent of an “owner” by an “expropriating authority” in the exercise of its statutory powers. Expropriation most often arises due to the need for pubic utilities, transportation corridors and/or public facilities. The Supreme Court of Canada has stated that expropriation is one of the ultimate exercises of governmental authority.

Legislation pertaining to expropriation varies by province (e.g. Alberta Expropriation Act, Ontario Expropriations Act. In no circumstance can an expropriation occur without the owner of the expropriated land being fairly compensated for the taking. Moreover, legislation and case law support the position that compensation should be fair and equitable, leaving the owner “whole” after the expropriation. This typically includes the recovery of reasonable professional fees for legal counsel and valuation experts.

Our expertise in tangible (Commercial Real Estate) and intangible (goodwill) valuations gives us the ability to see the “whole” picture when dealing with expropriations involving commercial real estate and operating businesses.

Whether or not you “have to” obtain an independent appraisal depends on various factors. In our view, the potential cost(s) of improperly estimating value on your own should always be evaluated against the cost of obtaining an independent valuation from a qualified professional.

For example, most lenders will require an independent property appraisal prior to advancing mortgage proceeds. Conversely, the Canada Revenue Agency (CRA) does not require a taxpayer to obtain an independent valuation for any reason; however, the CRA does explicitly state that fair market value estimates must be determined by a fair and reasonable method which is properly applied.

An Employee Stock Option Plan (ESOP) is becoming a more and more common form of employee remuneration. Under an ESOP, employees have the option (but not the obligation) to purchase securities in the company at some future date at some predetermined price. If all goes as planned, the value of the underlying security will have increased to a point where the option price is lower than the current market value and as a result the owner of the Stock option will profit upon exercising his/her option. The valuation of the stock options forms an integral part of any ESOP – this is where we help.

A co-insurance clause protects the insurer by requiring the policyholder to insure its property and/or business for a minimum amount, typically 90% to 100%. If a building or business suffers a loss and the minimum insurance coverage is not in place, the insurer can make the policyholder pay a proportionate share of the shortfall.