What Makes A Good Business Valuer?
An expert business valuer is not only knowledgeable and experienced in their field, but they must also be good at communicating complex issues in an effective and simple manner, conducting in depth investigation and analysis to support conclusions and be able to manage multiple processes.
A good business valuer is someone who can clearly document and explain an opinion on the value of assets that is derived using:
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Best practices.
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Compliant to and consistent with required standards.
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Supported by the required evidence.
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Is independent.
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Delivered on time.
Business Valuation Standards
There are currently no centralised set of compulsory standards for business valuation for all applications. There is agreement within Australia that professional business valuation reports will meet at least one or more of three primary standards:
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APES 225 (Valuation Services) in conjunction with APES GN 20
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International Private Equity and Venture Capital Valuation Guidelines
In almost all cases this list of standards are not exhaustive, and all ATO compliant business valuations conform to APES 225.
The APES 225 (Accounting Professional & Ethical Standards) sets out the standards required for CPA Members in the “…provision of quality and ethical Valuation Services”. It is the minimum standard for providing a valuation service and business valuation report.
APES 225 sets out three valuation services:
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Valuation Engagement – where the business valuer has freedom to apply valuation approaches, methodologies and procedures in reaching a conclusion.
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Limited Scope Valuation Engagement – where the business valuer has limited scope to use valuation approaches, methodologies and procedures.
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Calculation Engagement – where the business valuer uses agreed application of valuation approaches, methodologies and procedures.
A copy of the latest revision of APES 225 can be downloaded here.
The International Valuation Standards Council “…is an independent, not-for-profit organisation committed to advancing quality in the valuation profession.” They have also issued valuation standards, which has a much wider scope than APES 225.
The IVSC Standards refers to asset classes other than businesses and takes into account valuation standards in other regions such as US. Whilst there is a lot of similarity with APES 225, there are some key differences that must be considered when valuing entities across international jurisdictions.
ASIC has detailed the requirements for the content of expert reports such as valuation reports in Regulatory Guide RG111. In effect ASIC has said that they will not prescribe valuation methodologies to be used and that a valuation report must utilise multiple valuation methods in arriving at its conclusions. Some guidance has been provided, but kept very general in nature.
Our Business Valuation Reports
Complies with
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APES 225 and IVS
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Evidence requirements for Family Court and Supreme Court
Our reports also comply with IPEVC Valuation Guidelines when required for these purposes.
Court Requirements for Business Valuers
The courts take a similar view to ASIC and are not prescriptive in the requirements for business valuers as experts. Their definition of an expert is “…an independent person who has relevant specialised knowledge, based on the person’s training, study or experience”.
There are a range of standards for expert witnesses to give evidence in court either as an expert in person or through provision of a business valuation report. These include the Family Court (divorce business valuations), Supreme Court (most commercial dispute business valuations) and the Federal Court.
In effect a business valuer must be able to demonstrate technical knowledge, experience within the relevant industry and compliance with relevant standards.
Certification of Business Valuers
Despite many recent regulatory reforms, the business valuation industry does not yet have a centralised regulatory body that manages the registration, certification or training of business valuers.
There are a number of bodies that provide differing levels of training that result in certificates of completion issued. However there is no single certification of business valuers that is agreed and required by all regulatory bodies in conducting business valuations. There are requirements in different states for certification of property valuers, however these regulations do not extend to business valuations.
There are also some well-worn myths such as:
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I need a sworn valuation for my business.
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I must have a valuation from a certified business valuer.
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A business valuer is another name for a business broker.
Each of these are false – to varying degrees and we have detailed the common issues in a recent blog post on Dispelling the Myths About Business Valuation.
On the qualifications of business valuers the ATO states that “business valuers traditionally have significant experience in areas such as financial markets, investment banking, corporate finance or corporate management, and academic qualifications in areas such as accounting, finance or economics.”
ASIC recommends that business valuers considered as experts in the field of business valuation and s9 of the Corporations Act defines an expert as “…a person whose profession or reputation gives authority to a statement made by him or her in relation to that matter.” The independence of experts is dealt with in Regulatory Guide RG112.
Independence of the Business Valuer
One of the most important requirements of APES 225 and IVS is the requirement of independence.
Not only does this extend to fee arrangements that are not contingent on the outcomes of the report, but also that the perception of independence is protected through processes adopted in the consulting process. This includes:
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Ensuring opportunity to collate facts and information from all parties involved.
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Presentation of analysis that considers all perspectives of the business valuation.
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Requesting project scopes that ensure the valuer's independence in writing the report and drawing conclusions.
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The business valuer being able to exercise a right to refuse to provide an opinion or report if not provided with the information and explanations requested.
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Ensuring the business valuer would be provided with all necessary requirements needed to complete the report.
Business Valuation Experience
So how much business valuation experience is required to be an expert and how do you know they can meet your needs?
The message from all the various institutions (APES, IVSC, ATO, ASIC and courts) is that an expert who is someone who is across all the issues and technical details of that field. With SME’s, it is also important that an expert has experience in the industry in which the business operates.
Ideally an SME expert business valuer should have, at least:
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A minimum of 10 years’ experience in valuing businesses.
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A detailed knowledge of the industry issues and trends
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Tertiary qualifications specialising in business, accounting, finance or similar.
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A detailed awareness of the different valuation standards and how they apply to your circumstances.
Project Management Principles
It is not often talked about however a successful business valuation project must not only meet expected outcomes, but also the process of completing the consulting project must meet expectations.
An effective business valuer must be able to manage the collation of information from a variety of sources, analyse a wide diversity of information, arriving at valuation conclusions and communicating the outcomes.
Some of the key project management features in a business valuation project include:
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Defined scope and parameters (what is being valued and to what standard).
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Statement of a clear project objective (statement of opinion on value).
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Deadlines and reporting requirements.
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Agreed fees.
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Expectation of what is to be included and excluded in the project.
Our Business Valuers Experience
Exit Value Advisers has:
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Been consulting to over 1,000 SMEs over an 18 year period.
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Completed more than 1,000 business valuations.
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Undertaken business valuations for a diverse range of applications including
Selecting a Good Business Valuer
In the absence of indepednent assessments of business valuers, identifying an effective business valuer specialist will come down to how well they can answer some critical questions and demonstrate a history of experience and achievements.
As a minimum a business valuer expert should be able to readily show or demonstrate:
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At least 10 years’ experience in valuing businesses.
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Detailed experience in the industry within which your business operates (eg transport, retail, etc).
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Tertiary qualifications specialising in business, accounting, finance or similar.
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Projects completed for the same reasons your project requires (eg ATO reporting, divorce, selling a business, etc).
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A detailed awareness of the different valuation standards and how they apply to your circumstances.
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They follow a code of conduct covering ethics, integrity and independence.
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That valuing businesses is their core business activity.
You also want a business valuer who can simply and easily answer the following questions in a manner that YOU understand:
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How many valuations has the valuer completed overall and in your industry ?
- How will the business valuer select the methodology to apply?
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How will the valuer inspect and assess the business?
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Will the business valuer assess non-financial aspects of the business such as marketing, processes and systems?
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What structure does the valuer use in their report to detail assumptions, information collated, business analysis, valuation calculations and conclusions?
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What market evidence will the valuer rely upon in making conclusions?
- How many valuation methods will be used to arrive at the conclusion of value? Will they use discounted cash flow, comparable transactions or asset value for additonal evidence?
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Can the business valuer explain the difference between enterprise and equity value?
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Can the business valuer explain the difference between EBITDA and Operating Cashflow?
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Can the business valuer provide an explanation of their report in plain English but also able to justify their conclusions under scrutiny from third parties?
A good business valuer will be able to quickly and easily demonstrate the requirements for your project and explain exactly what is required to produce a reliable and credible report.
