M&A International™ – the world's leading M&A alliance

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.1

M&A International™ – the world's leading M&A alliance

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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Speaker

Howard E. JohnsonMBA, FCPA, FCA, FCMA, CBV, CPA, CFA, ASA, C.DirManaging 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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