What it means
Valuing a listed company is largely a matter of reading a screen, but a private business has no observable price. Someone has to choose a method, defend the assumptions and produce a figure that stands up to challenge, and that is the work this designation certifies.
The qualification is awarded by the Canadian institute that governs the profession, after a series of examinations, a practical experience requirement and a final entrance paper. Holders are bound by practice standards that dictate how each level of report is prepared and what a reader is entitled to rely on.
Those report levels matter commercially. A calculation report is the cheapest and most limited, an estimate report sits in the middle, and a comprehensive report involves the most verification work and carries the most weight in a courtroom or a contested tax assessment.
In practice a valuator cross-checks two or three approaches rather than relying on one. The usual candidates are capitalised cash flow, a multiple of earnings drawn from comparable transactions, and an asset-based figure for businesses whose value sits mainly in property or equipment.
The designation is Canadian, and other countries have their own equivalents with different letters, so do not assume one qualification is recognised everywhere. What does travel is the underlying expectation that an independent valuation states its purpose, its effective date, its scope of work and the assumptions a reader would want to question.
Cost and timing are driven by the report level and the state of the records. Expect several weeks of work for a straightforward owner-managed business, and expect the valuator to ask for normalised accounts, meaning figures adjusted to strip out owner perks and one-off items so the earnings reflect how the business would run for a new owner.
In practice
Real-world examples.
Example
Two founders of a regional print business fall out, and the shareholders' agreement requires an independent valuation to set the buyout price. Each side appoints a Chartered Business Valuator, the two opinions come in $900,000 apart, and the agreement sends the question to a third valuator whose figure binds them both.
Example
A family-owned equipment hire company reorganises its share structure so the next generation can build up value in new shares. The accountant insists on a formal valuation at the date of the reorganisation, because a figure the tax authority later rejects would turn a tidy succession plan into an unexpected tax bill with interest attached.
Example
A private equity buyer offers 5 times earnings for a specialist cleaning contractor, and the seller's adviser produces a valuator's report arguing for 6.5 times on the strength of contracted recurring revenue. The negotiation then runs on the report's assumptions rather than on opinion, and the parties settle at 6 times with part of the price deferred.
Case study
Seen in the real world.
Larkfield Composites is a fictional, owner-managed manufacturer used here as an illustrative example. Its founder wanted to sell to his management team and had been told by a broker that businesses like his went for four times profit, which on reported profit of $1,100,000 suggested $4,400,000.
The valuator's first step was to normalise the accounts. The founder had been paying himself $90,000 while a market-rate managing director would cost $220,000, two vehicles and a boat were in the company, and a one-off insurance recovery of $160,000 sat in the prior year, so normalised earnings came out at $880,000 rather than $1,100,000.
The invented result was a lower headline number but a deal that actually closed. At a defensible multiple the business was valued near $3,800,000, the buyers' bank accepted the comprehensive report as the basis for lending, and the founder avoided the far worse outcome of agreeing a price the funders would not support.
Watch out
Common mistakes.
- Treating a rule of thumb as a valuation, when a multiple taken from a trade magazine ignores that specific business's contracts, customer concentration and dependence on the owner.
- Buying the cheapest report level and then relying on it in a dispute, where the limited scope of work is exactly what the other side will attack.
- Valuing a business on reported profit without normalising for the owner's salary, personal costs and one-off items, which can move the answer a long way in either direction.
Questions
People also ask.
Is a Chartered Business Valuator the same as an auditor?
No, an auditor gives an opinion on whether historical statements are fairly stated, while a valuator gives an opinion on what a business or asset is worth at a particular date.
Does the designation carry weight outside Canada?
The designation itself is Canadian, although holders frequently work on cross-border engagements, and most other countries have their own accredited valuation qualifications serving the same purpose locally.
How long does a valuation stay usable?
It is an opinion at a stated date, so a lost major customer, a sharp change in trading or a shift in market multiples can make it stale within months.
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