bgv - business valuation, business valuations, selling business, business sale, buying business, valuation report, faq's

General

What valuation method does bgv group rely on in a fair market valuation?
What does “independence” really mean?
What does a typical valuation report cost?
How long does it take to complete a valuation report?
Will you be able to testify about the value you provide in court?

For private companies

Why shouldn't my accountant value my business?
When are values of public companies used to value private companies?
If public companies are trading at price to earnings multiples of 10, 15 or higher, should my business be valued based on the same multiples?
What is a minority interest discount?
What is a liquidity discount?

For public companies

Can my auditor perform the goodwill impairment test?
Our managers currently conduct our impairment testing. What value can bgv group add to the process?
I am a non-executive director of an ASX listed company and am already inundated with financial reports and advice from our investment bank, accountants and managers. What is the value of yet another adviser?

General

What valuation method does bgv group rely on in a fair market valuation?

There exist several approaches to valuation of businesses or entities, the most common of which are:
(a) the discounted cash flow (DCF) method;
(b) the capitalisation of earnings method (i.e. using a multiple to apply to an estimate of future maintainable earnings or cash flows); and
(c) an asset-based valuation method.

The approach we use will depend on the type of business being valued and the information available. Back to top

What does “independence” really mean?

“Independence” is a term that is frequently used in the financial services industry. When we use the term to describe our philosophy, we mean that we have no interest in the outcome of a client engagement. Our clients may not always like the valuation report they get from us but they can always be sure that it will be objective, unbiased and reliable. Back to top

What does a typical valuation report cost?

The cost of a business valuation report will vary based on the complexity of the project. We will prepare an estimate for the report based on the hourly rates of the persons involved in the report and the time required to complete it.    Back to top

How long does it take to complete a valuation report?

Whilst the time required to complete a valuation report depends on its complexity, as a general rule, it typically takes 2-4 weeks. This period includes a data collection & review stage, meetings with management and accountants, analysis and report writing. Nevertheless, we take pride in our ability to meet client deadlines and will do everything possible to meet clients’ needs.    Back to top

Will you be able to testify about the value you provide in court?

Yes. We are prepared to support our findings and work with your lawyer in mediation or litigation proceedings. Because several of our principals are qualified lawyers, we understand the complexity of litigation and the process of testifying in court.      Back to top

For private companies

Why shouldn't my accountant value my business?

We work closely with your accountant to prepare our valuation report, however we find that not all accountants have the necessary expertise to value a business.   For example, many accountants are not comfortable forecasting future cash flows, determining the appropriate discount rates or predicting industry trends.  For this reason, we recommend that the services of an independent valuation expert should be retained.     Back to top

When are values of public companies used to value private companies?

Public companies provide a useful starting point when valuing private businesses. However, private companies are often smaller, have less financial transparency and liquidity and do not provide benefits of diversification. Accordingly, private companies are perceived as higher risk investments and tend to be valued less highly than comparable publicly listed peers.     Back to top

If public companies are trading at price to earnings multiples of 10, 15 or higher, should my business be valued based on the same multiples?

Privately held businesses are rarely worth as much as similar businesses that are traded on the stock exchange (see above). Several reasons for this include the size, depth in management, liquidity, ability to raise capital and possible lack of transparency of a private business. Reaching the appropriate multiple requires analysis of your business to properly understand how it correlates to a similar public business (if at all).      Back to top

What is a minority interest discount?

A minority interest discount reflects the fact that owners of less than 51% of a company are not able to direct how that company is managed. The discount is deducted from the value of 100% (control value) of the business to reflect the absence of the powers of control. The minority discount is directly related to the “control premium”, which is the amount by which the pro rata value of a controlling interest exceeds the pro rata value of a minority interest that reflects the value of control.     Back to top

What is a liquidity discount?

The liquidity discount reflects the fact that there are a limited number of potential buyers of private companies and, as a result, ownership interests cannot be sold easily. This lack of liquidity may adversely impact the owners’ ability to sell in a timely manner. This is in contrast to publicly listed companies, which can be traded easily and with low transaction costs on public stock exchanges.     Back to top

For public companies

Can my auditor perform the goodwill impairment test?

There are two issues to consider: 1/ does my auditor have the necessary skills to value goodwill? and 2/ do the rules on auditor independence allow the auditor to do so?

On the first issue, some auditors will be sufficiently experienced to assist in preparing a valuation report, while others will find it takes them outside their comfort zone. We would only make the comment that an audit is by its nature backwards looking, whereas a valuation is forward-looking, requiring forecasting and industry analysis expertise. We believe our experience, independence and value proposition ensure we are well-placed to prepare discrete valuation assignments for our clients.

On the second issue, the Auditor’s Independence Guide provides that there exists a threat of “self-review” when an audit firm performs a valuation service for an audit client that forms part of the client’s financial statement. If the valuation service is “material”, that firm should withdraw from the audit. Recent comments made by ASIC representatives suggest that auditors should not prepare valuation services for their audit clients.        Back to top

Our managers currently conduct our impairment testing. What value can bgv group add to the process?

For compliance best practice reasons, we strongly advise companies to engage an independent expert to assist in goodwill impairment testing. This is because AASB 136 provides that management's projections must be "reasonable and supportable" with "greater weight given to external evidence". bgv group can provide an independent assessment to ensure that these requirements are met.

In addition, many managers may not have the time or the expertise to prepare a detailed goodwill valuation report, which can be a very onerous task. In certain circumstances, managers may be too intimately involved in an acquisition to recognise that an impairment risk has arisen and a valuation reality check from an independent expert may prove invaluable.

The key issue to consider is this. Following an unexpected impairment of goodwill, if investors and/or directors ask why impairment had not occurred earlier, a company may leave itself exposed if it has relied solely on internal valuations rather than being able to point to the advice of an independent valuation expert. Accordingly, the involvement of an independent valuation expert in goodwill impairment testing may counter any claims of potential conflict of interest. Back to top

I am a non-executive director of an ASX listed company and am already inundated with financial reports and advice from our investment bank, accountants and managers. What is the value of yet another adviser?

In recent years, the compliance pressures on directors have dramatically increased. It is no longer sufficient for directors to rely blindly on their company’s advisers, some of whom face conflicts of interests (e.g. investment bank will earn success fees on transactions, employees may be reluctant to admit to a poor acquisition they were involved in).

Directors must now actively seek out information to determine whether they are comfortable with the assumptions that underlie advisers’ reports. As independent valuation specialists, we use our equity markets experience to assist directors determine which questions to ask of their companies’ advisers, for example:

“The market assumes that our company’s goodwill has been impaired. Why do our accounts show that it has not?”
“Who has tested the goodwill for impairment? If our auditor, does this breach the rules of audit independence and place directors at risk? If our managers, do they have the necessary expertise?”
“What are the key assumptions underlying the valuation of this target company? Is a beta of 0.7 appropriate? How does it compare with similar companies? How do the forecast margins compare with peers?
“Isn’t a market risk premium of 4.5% significantly lower than that historically observed and that used by investors and analysts?”
“Are these ‘one-off’ items in our draft accounts really ‘one-offs’? How will the equity market interpret them and what are the implications for earnings growth?” Back to top

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	General What valuation method does bgv group rely on in a fair market valuation? What does “independence” really mean? What does a typical valuation report cost? How long does it take to complete a valuation report? Will you be able to testify about the value you provide in court? For private companies Why shouldn't my accountant value my business? When are values of public companies used to value private companies? If public companies are trading at price to earnings multiples of 10, 15 or higher, should my business be valued based on the same multiples? What is a minority interest discount? What is a liquidity discount? For public companies Can my auditor perform the goodwill impairment test? Our managers currently conduct our impairment testing. What value can bgv group add to the process? I am a non-executive director of an ASX listed company and am already inundated with financial reports and advice from our investment bank, accountants and managers. What is the value of yet another adviser? General What valuation method does bgv group rely on in a fair market valuation? There exist several approaches to valuation of businesses or entities, the most common of which are: (a) the discounted cash flow (DCF) method; (b) the capitalisation of earnings method (i.e. using a multiple to apply to an estimate of future maintainable earnings or cash flows); and (c) an asset-based valuation method. The approach we use will depend on the type of business being valued and the information available. Back to top What does “independence” really mean? “Independence” is a term that is frequently used in the financial services industry. When we use the term to describe our philosophy, we mean that we have no interest in the outcome of a client engagement. Our clients may not always like the valuation report they get from us but they can always be sure that it will be objective, unbiased and reliable. Back to top What does a typical valuation report cost? The cost of a business valuation report will vary based on the complexity of the project. We will prepare an estimate for the report based on the hourly rates of the persons involved in the report and the time required to complete it. Back to top How long does it take to complete a valuation report? Whilst the time required to complete a valuation report depends on its complexity, as a general rule, it typically takes 2-4 weeks. This period includes a data collection & review stage, meetings with management and accountants, analysis and report writing. Nevertheless, we take pride in our ability to meet client deadlines and will do everything possible to meet clients’ needs. Back to top Will you be able to testify about the value you provide in court? Yes. We are prepared to support our findings and work with your lawyer in mediation or litigation proceedings. Because several of our principals are qualified lawyers, we understand the complexity of litigation and the process of testifying in court. Back to top For private companies Why shouldn't my accountant value my business? We work closely with your accountant to prepare our valuation report, however we find that not all accountants have the necessary expertise to value a business. For example, many accountants are not comfortable forecasting future cash flows, determining the appropriate discount rates or predicting industry trends. For this reason, we recommend that the services of an independent valuation expert should be retained. Back to top When are values of public companies used to value private companies? Public companies provide a useful starting point when valuing private businesses. However, private companies are often smaller, have less financial transparency and liquidity and do not provide benefits of diversification. Accordingly, private companies are perceived as higher risk investments and tend to be valued less highly than comparable publicly listed peers. Back to top If public companies are trading at price to earnings multiples of 10, 15 or higher, should my business be valued based on the same multiples? Privately held businesses are rarely worth as much as similar businesses that are traded on the stock exchange (see above). Several reasons for this include the size, depth in management, liquidity, ability to raise capital and possible lack of transparency of a private business. Reaching the appropriate multiple requires analysis of your business to properly understand how it correlates to a similar public business (if at all). Back to top What is a minority interest discount? A minority interest discount reflects the fact that owners of less than 51% of a company are not able to direct how that company is managed. The discount is deducted from the value of 100% (control value) of the business to reflect the absence of the powers of control. The minority discount is directly related to the “control premium”, which is the amount by which the pro rata value of a controlling interest exceeds the pro rata value of a minority interest that reflects the value of control. Back to top What is a liquidity discount? The liquidity discount reflects the fact that there are a limited number of potential buyers of private companies and, as a result, ownership interests cannot be sold easily. This lack of liquidity may adversely impact the owners’ ability to sell in a timely manner. This is in contrast to publicly listed companies, which can be traded easily and with low transaction costs on public stock exchanges. Back to top For public companies Can my auditor perform the goodwill impairment test? There are two issues to consider: 1/ does my auditor have the necessary skills to value goodwill? and 2/ do the rules on auditor independence allow the auditor to do so? On the first issue, some auditors will be sufficiently experienced to assist in preparing a valuation report, while others will find it takes them outside their comfort zone. We would only make the comment that an audit is by its nature backwards looking, whereas a valuation is forward-looking, requiring forecasting and industry analysis expertise. We believe our experience, independence and value proposition ensure we are well-placed to prepare discrete valuation assignments for our clients. On the second issue, the Auditor’s Independence Guide provides that there exists a threat of “self-review” when an audit firm performs a valuation service for an audit client that forms part of the client’s financial statement. If the valuation service is “material”, that firm should withdraw from the audit. Recent comments made by ASIC representatives suggest that auditors should not prepare valuation services for their audit clients. Back to top Our managers currently conduct our impairment testing. What value can bgv group add to the process? For compliance best practice reasons, we strongly advise companies to engage an independent expert to assist in goodwill impairment testing. This is because AASB 136 provides that management's projections must be "reasonable and supportable" with "greater weight given to external evidence". bgv group can provide an independent assessment to ensure that these requirements are met. In addition, many managers may not have the time or the expertise to prepare a detailed goodwill valuation report, which can be a very onerous task. In certain circumstances, managers may be too intimately involved in an acquisition to recognise that an impairment risk has arisen and a valuation reality check from an independent expert may prove invaluable. The key issue to consider is this. Following an unexpected impairment of goodwill, if investors and/or directors ask why impairment had not occurred earlier, a company may leave itself exposed if it has relied solely on internal valuations rather than being able to point to the advice of an independent valuation expert. Accordingly, the involvement of an independent valuation expert in goodwill impairment testing may counter any claims of potential conflict of interest. Back to top I am a non-executive director of an ASX listed company and am already inundated with financial reports and advice from our investment bank, accountants and managers. What is the value of yet another adviser? In recent years, the compliance pressures on directors have dramatically increased. It is no longer sufficient for directors to rely blindly on their company’s advisers, some of whom face conflicts of interests (e.g. investment bank will earn success fees on transactions, employees may be reluctant to admit to a poor acquisition they were involved in). Directors must now actively seek out information to determine whether they are comfortable with the assumptions that underlie advisers’ reports. As independent valuation specialists, we use our equity markets experience to assist directors determine which questions to ask of their companies’ advisers, for example: “The market assumes that our company’s goodwill has been impaired. Why do our accounts show that it has not?” “Who has tested the goodwill for impairment? If our auditor, does this breach the rules of audit independence and place directors at risk? If our managers, do they have the necessary expertise?” “What are the key assumptions underlying the valuation of this target company? Is a beta of 0.7 appropriate? How does it compare with similar companies? How do the forecast margins compare with peers? “Isn’t a market risk premium of 4.5% significantly lower than that historically observed and that used by investors and analysts?” “Are these ‘one-off’ items in our draft accounts really ‘one-offs’? How will the equity market interpret them and what are the implications for earnings growth?” Back to top

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