Valuation in disputes
The types of disputes where business valuation are often required include:
- Shareholder disputes, for example, partner disputes and minority oppression, requiring the value of the shares
- Matrimonial disputes, requiring the valuation of the matrimonial pool of assets, for example, shares in a private business or thinly traded stocks
- Transaction disputes, for example, misleading and deceptive representations leading to the loss of business value
- Breaches of contract, for example, breach of a non-compete clause leading to the loss of business value
Judicial interpretation of value
The key legal matter in relation to the definition of market value is the High Court case Spencer v The Commonwealth of Australia. This case identified the key principals of market value:
- willing but not anxious vendor and buyer
- hypothetical market
- parties aware of current market conditions
- value at the”highest and best use.”
The definition of value, however, is not always clear and the purposes of the report may influence the basis of value. Definitions of value include market value, fair value, synergy value, and investment value.
According to the International Valuation Standards (IVS), there are three main valuation approaches to valuing a business:
- Market approach – Per IVS 105 20.1 the Market Approach provides an indication of value by comparing the asset with identical or similar assets for which price information is available.
- Income Approach – Per IVS 105 40.1 the Income Approach provides an indication of value by converting future cash flow to a single current value.
- Cost Approach – Per IVS 200 70.1 the Cost Approach is sometimes applied in the valuation of a business if the business does not represent a going concern and/or the value of its assets in a liquidation may exceed the business’ value as a going concern.
Valuation reports will typically include the following:
- Engagement & instruction details, the purpose of engagement and scope, definition of value and why, key assumptions, information relied upon (contained in appendix), a statement of independence and duties to the court
- Description of the business, business ownership structure and what is being valued (eg. equity or the business)
- Consideration and description of key customers, products & services, suppliers, competitive advantage and risk profile
- Consideration and description of relevant industry analysis
- Analysis of financial information for the last 5 years and analysis of current financial & forecast information, consideration of the accounting policies applied and sources of financial information, eg. audited?
- Consideration and description of any non-business and non-recurring income and expenses
- Consideration and description of appropriate valuation approaches and explanation for the method chosen
- Consideration and description of any relevant market date, eg. relevant transactions or comparable company data
- Where relevant, the application of a Discount for Lack of Control and the rationale and support for the discount applied
- Where relevant, the application of a Discount for Lack of Marketability and the explanation and support for the discount applied
- Where relevant, consideration and description of any surplus assets and liabilities
- Valuation calculation and explanation
- Any methods used as a cross-check, eg. rules of thumb
- Consideration of the value applicable to intangible assets, including goodwill
- Qualifications & experience of author
Valuation reports follow the requirements of the rules as set out
- International Valuation Standards Council. The International Valuation Standards (IVS) Council is the independent global standard setter for valuation practice and the valuation profession, standards that apply include IVS 101 Scope of Work, IVS 102 investigations and compliance, IVS 103 Reporting, IVS Bases of value, IVS valuation approaches and methods and IVS business and business interests
- APES 225. The Accounting Professional & Ethical Standards Board (APESB) standard on Valuation Services. The standard distinguishes three types of valuation service: Calculation Engagement, Limited Scope Valuation Engagement, and Valuation Engagement. The standard covers issues such as the responsibilities of members, engagement and certain mandatory reporting requirements for members.
- APES GN20 – Scope and Extent of Work for Valuation Services. This Guidance Note issued by the APESB provides assistance to members on the application of APES 225. The note does not prescribe any mandatory requirements. The Note provides guidance on areas such as the information to be considered in the appropriate valuation service and the extent of work to be completed and evidence obtained. The Note is based and developed from the Canadian Institute of Chartered Business Valuators guidance.
Simon is a CA Business Valuation specialist in Brisbane, Chartered Accountant and a Certified Fraud Examiner. Simon specialises in providing business valuation services. Prior to founding Lotus Amity, he was a Corporate Finance and Forensic Accounting partner with BDO Australia. Simon provides valuation services in disputes, for raising finance, for restructuring, transactions and for tax purposes.