122 Valuation of businesses, business ownership interests and securities

Transcription

1 122 Valuation of businesses, business ownership interests and securities by Brendan Halligan BEc, MA (Acc), F Fin, FCA Mark Butterfield BEc, F Fin, FCA Update: 78

2 EXPERT EVIDENCE Author information Brendan Halligan is a Chartered Accountant and the principal of Halligan & Co, where he specialises in business valuation services (including the valuation of shares, businesses, intangible assets, goodwill and options) and forensic accounting services. He was formerly a partner of Ernst & Young and a director of Ernst & Young Transaction Advisory Services Limited where he specialised in business valuation services. Before that he was a partner of Andersen and a director of Andersen Corporate Finance Limited. At Andersen, Mr Halligan was a partner in the forensic accounting practice and later was the national head of the business valuation practice. He has been invited to present on valuation and forensic matters at national and state conferences on a number of occasions. He has also been a member of the national committee of the Business Valuation Special Interest Group and of the Forensic Accounting Special Interest Group of the Institute of Chartered Accountants in Australia. Contact details: Brendan Halligan Halligan & Co Phone: brendan.halligan@halligan.com.au Mark Butterfield is a Chartered Accountant and a Director with Halligan & Co, where he specialises in business valuation services (including the valuation of shares, businesses, intangible assets, goodwill and options) and forensic accounting services. He was formerly a partner of PKF where he specialised in business valuation services. Before that, in a career of over 20 years with PricewaterhouseCoopers, he was a Director in the forensic accounting practice and earlier a Director in the business valuation practice. His experience also includes his time as the Head of Consulting for AME Mineral Economics, one of the world s foremost mineral commodity research and analysis firms. He has been a member of the national committee of the Business Valuation Special Interest Group of the Institute of Chartered Accountants and of the faculty task force for the business valuation topics for the diploma and masters level courses of the Financial Services Institute of Australasia. Contact details: Mark Butterfield Halligan & Co Phone: mark.butterfield@halligan.com.au Expert Evidence

3 TABLE OF CONTENTS GLOSSARY INTRODUCTION...[122.10] VALUATION PROFESSION IN AUSTRALIA...[122.20] Professional standard: APES 225 Valuation Services Scope of APES [122.40] Types of engagement...[122.50] Valuation terms...[122.70] Content of a valuation report...[122.90] SUBJECT OF VALUATION...[ ] PURPOSE OF VALUATION...[ ] DATE OF VALUATION...[ ] STANDARDS OF VALUE...[ ] Market value...[ ] Fair market value...[ ] Fair value...[ ] Fair value in accounting standards...[ ] Fair value in contract cases...[ ] Fair value in oppression cases...[ ] Fair value in the compulsory acquisitions of securities...[ ] Real value in misrepresentation cases...[ ] Value to the owner...[ ] Value to the owner in land resumption cases...[ ] Value to the owner in family law cases...[ ] Value and price...[ ] PREMISES OF VALUE...[ ] DETERMINING AN ESTIMATE OF VALUE FOR A BUSINESS...[ ] BASIC MATHEMATICS OF DISCOUNTING AND CAPITALISING.[ ] SALES EVIDENCE METHOD...[ ] DISCOUNTED CASH FLOW METHOD...[ ] The calculation...[ ] Type of cash flow...[ ] Expected cash flows...[ ] Explicit forecast period...[ ] Terminal value...[ ] Discount rate...[ ] Weighted average cost of capital...[ ] Cost of debt...[ ] Cost of equity...[ ] Capital structure...[ ] CAPITALISED MAINTAINABLE EARNINGS METHOD...[ ] The calculation...[ ] Maintainable earnings...[ ] Capitalisation multiple...[ ] ORDERLY REALISATION OF ASSETS METHOD...[ ] THE RELATIVE MERITS OF THE VALUATION METHODS...[ ] DETERMINING AN ESTIMATE OF VALUE FOR EQUITY...[ ] Surplus net assets...[ ] Debt...[ ] Discount for relative lack of control...[ ] Discount for relative lack of marketability...[ ] SELECTED BIBLIOGRAPHY Update: 78

4 EXPERT EVIDENCE Expert Evidence

5 Glossary APESB Accounting Professional and Ethical Standards Board AASB Australian Accounting Standards Board BVSIG Business Valuation Special Interest Group CAPM Capital asset pricing model CME Capitalised maintainable earnings DCF Discounted cash flow Earnings Profits EAT Earnings (ie profits) after deduction of tax expense. EBIT Earnings (ie profits) before deduction of net interest expense and tax expense EBITDA Earnings (ie profits) before deduction of net interest expense, and tax, depreciation and amortisation expenses EV Enterprise value International Glossary International Glossary of Business Valuation Terms g Expected growth rate per period r Discount rate per period CF Expected cash flow per period ORA Orderly realisation of assets PV Present value t Period t c Corporate tax rate [122.10] How much is it worth? WACC Weighted average cost of capital INTRODUCTION The answer to that apparently simple question may have very significant consequences in the assessment of damages, the division of property under family law, the assessment of income tax, the accounting for an acquisition, the price that a purchaser might pay, and the amount a financier might lend, amongst other things. And the apparent simplicity of the question belies the often complex theoretical and practical issues that must be addressed in answering it Update: 78

6 GLOSSARY To answer the question How much is it worth? a valuer must first answer a series of other questions: What is being valued? For example, is it the business or the share capital of the company that owns the business? This question addresses the subject of the valuation and is discussed at [ ]. 1 Why is the valuation required? The purpose of the valuation might affect the value. This is particularly the case in those legal contexts where there are rules requiring the valuer to change what he or she would otherwise do. For example, the constitution of a company might compel a valuer to adopt a particular valuation method in a certain situation. The purpose of the valuation is discussed at [ ]. When is the value to be assessed? Values can change over time and the choice of the valuation date can be very important. Also relevant here is the question of the set of information that the valuer may take into account, eg is it appropriate to use hindsight? The valuation date is discussed at [ ]. Value to whom and under what conditions? Sometimes, a business is worth more to its owner than to potential purchasers. Knowing to whom value is to be assessed will, in part, determine the standard of value (ie the concept of value). Also, if value is to be based on a hypothetical exchange then the basic conditions of that transaction in part known as the premise of value need to be identified. Standards of value are discussed at [ ] and premises of value at [ ]. How is the valuation to be performed? The valuer must choose between various valuation approaches and methods, each of which may be suitable for some situations but not others. These are discussed at [ ]. The focus in this chapter is the valuation of businesses, business ownership interests (ie partial interests in a business) and securities (eg shares in a company or units in a unit trust). 2 There is a large body of knowledge relating to the valuation of these assets and it is not possible in a chapter to address all of its important aspects. So rather than attempting a comprehensive survey of the discipline we have tried to present an introduction to the key concepts so as to assist in the critical reading of valuation reports and the examination of expert witnesses. Readers who would like a deeper understanding will find useful references in the bibliography. 1 It may also be relevant to consider where the subject of the valuation is located, particularly if it is in another country. This issue is outside the scope of this chapter. 2 A general reference in this chapter to a valuation is a reference to a valuation of a business, business ownership interest or securities. For convenience, much of the commentary is based on the valuation of a business. [The next text page is ] Expert Evidence

7 VALUATION PROFESSION IN AUSTRALIA [122.20] In Australia, there is no statutory system for the registration of business valuers such as those state-based systems which exist for real property valuers. Generally, any person may perform a valuation regardless of the level of their qualifications and experience (although if that valuation is in the form of an independent expert s report required under the Corporations Act 2001, such as a report for a takeover, the valuer will need to hold an Australian Financial Services Licence). In Australia most professional business valuers are accountants. The premier professional body for valuers in Australia is the Institute of Chartered Accountants (the ICAA). In 2013, the ICAA approved plans to introduce a voluntary system of accreditation for business valuers. Professional standard: APES 225 Valuation Services Scope of APES 225 [122.40] Valuers who are members of the professional accounting bodies 1 are obliged to comply with the requirements of APES 225 Valuation Services, which applies to engagements starting on or after 1 January Before APES 225, there was no standard specifically on valuation services, although other professional standards relating to any service that a member might provide applied (and continue to apply) to some aspects of valuation services. APES 225 defines a valuation to be the act or process of determining an estimate of value of a business, business ownership interest, security or intangible asset by applying valuation approaches, valuation methods and valuation procedures. APES 225 stipulates certain professional and ethical standards for valuers. However, it does not contain any technical standards on how value should be assessed. 1 The three main professional bodies for accountants in Australia are the ICAA; Certified Practising Accountants Australia (CPA Australia); and National Institute of Accountants (NIA). A copy of APES 225 may be obtained from the websites of the professional accounting bodies. 2 In addition to applying to members who are in public practice, APES 225 applies to members who are employees of commercial, not-for-profit, regulatory or government organisations although some of the obligations on these members are different to those of members in public practice. The focus in this chapter is on members in public practice. Types of engagement [122.50] APES 225 specifies three types of engagement: valuation engagements; limited-scope valuation engagements (which are sometimes called indicative valuations); and calculation engagements. The difference between a valuation engagement and a limited-scope valuation engagement is that with the latter the scope of work is in some way limited or restricted. A client might, for Update: 78

8 [122.50] EXPERT EVIDENCE example, instruct a valuer to perform a limited-scope valuation engagement in order to minimise the cost of the exercise. There are many ways in which the scope of work done could be limited, but they all amount to the valuer performing less work than would be the case for a valuation engagement. In recognition of this APES 225 requires the valuer to communicate clearly in the valuation report (a) the scope of work and any limitations or restrictions on that scope, and (b) where the engagement is a limited-scope valuation engagement, that if a valuation engagement had been performed instead the results may have been different. Both a valuation engagement and a limited-scope valuation engagement result in the valuer expressing a conclusion of value, which is an estimate of value expressed either as a single figure or a range of figures. A calculation engagement differs from a valuation engagement and a limited-scope valuation engagement in that the valuer and the client agree on the specific valuation approaches and methods that the valuer will use and the extent of valuation procedures the valuer will perform. In such an engagement the valuer is not free (either partly or fully depending on the agreement) to choose the approaches, methods and procedures that he or she considers appropriate. In recognition of the constraint upon the valuer, APES 225 requires the valuer to express a calculated value rather than a conclusion of value and to state that if a valuation engagement had been performed instead the results may have been different. Valuation terms [122.70] A practical difficulty in reading valuation reports is that valuers may use terms differently and sometimes imprecisely. To address this, APES 225 requires valuers to define clearly the valuation terms used in valuation reports. 1 It also encourages (but does not compel) valuers to use, to the extent practicable, the International Glossary which has been adopted by a number of North American valuation bodies including the American Institute of Certified Public Accountants and the Canadian Institute of Chartered Business Valuators. 2 However, some of the terms in the International Glossary (which reflects American English) have not yet found common usage and acceptance amongst valuers in Australia. 1 Paragraph 7.1 of APES Paragraph 7.2 of APES 225. See Appendix B to the Statement on Standards for Valuation Services, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, issued by the American Institute of Certified Public Accountants, June 2007; and the Canadian Institute of Chartered Business Valuators, Practice Bulletin No. 2, June Content of a valuation report [122.90] APES 225 requires a valuer to include the following minimum content in a written valuation report: 1 the name of the party engaging the valuer; a description of the business, business ownership interest, security or intangible asset being valued; the date at which the value has been determined; the date on which the valuation report has been issued; the purpose for which the valuation report has been prepared; the scope of the valuation, including any limitations or restrictions; Expert Evidence

9 VALUATION PROFESSION IN AUSTRALIA [122.90] the premise of value adopted in the valuation (eg going concern premise or liquidation premise); the valuation approach(es), valuation method(s), and valuation procedures adopted in determining the estimate of value and a description of how they were applied. a description of the material assumptions applied in the valuation and the basis for those assumptions; a conclusion of value for a valuation engagement or a limited scope valuation engagement, or a calculated value for a calculation engagement; all qualifications that materially affect the conclusion of value or calculated value; for a limited-scope valuation engagement or a calculation engagement, a statement that if a valuation engagement had been performed the results may have been different; and where the valuer has prepared a valuation report requiring independence or purporting to be independent, that the compensation to be paid to the valuer is not contingent on the conclusion, content or future use of the valuation report; and a statement that the valuation service was conducted in accordance with APES 225. APES 225 also sets out other elements that a valuer should consider incorporating into the report. 2 1 Paragraph 5.2 of APES 225. See also paragraph 5.4 for additional potential content. 2 Paragraph 5.4 of APES 225. [The next text page is ] Update: 78

10 [122.90] EXPERT EVIDENCE Expert Evidence