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Category Valuations

Managing Bias in the Valuation Process

A valuation is often viewed as a number crunching exercise with readily available inputs and assumptions available, but it typically involves many subjective assessments, choices and assumptions that are prone to bias in a valuation. That is often driven by the underlying purpose for the valuation and if not managed properly, can give a result that may be limited in its usefulness.

Common Sources of Bias

Forecasting: a forecast or projection of future cash flows from a business is a key input to a valuation model based on future cash flows. In preparing as a forecast, there are many sources of potential bias. For example, there can be too much reliance on personal experience, intuition instead of independent information and data in estimating revenue growth rates and profitability metrics. Even if objective information is utilized, confirmation bias can result in more weight in the analysis being given to information that confirms existing optimistic beliefs that may be optimistic or pessimistic. When estimating the profitability of a business, the historical performance is often given significant weight, but those historical results are often subject to adjustments intended to normalize the results which can be selectively included or excluded.

Valuation Inputs: beyond the forecast assumptions, there are various other inputs assumed in a valuation model related to working capital and capital expenditure requirements, identification of redundant assets, discount rates and terminal value adjustments. For example, discount rates should reflect the risk of achieving the future cash flows forecasted but there are several choices among alternatives in building the discount rates that are subject to bias. Any one of these inputs, if misapplied or selected without any objective basis, can result in significant variations in valuation conclusions.

Valuation Multiples: market participants may rely on a relative valuation or market approach as the primary valuation approach or as a secondary approach. Obtaining relevant data from truly comparable companies that are publicly traded can be difficult and there may be a temptation to use companies that are not comparable due to size, product mix, end markets, etc. In selecting valuation multiples from open market transactions, transactions may be selected that are too old or not relevant for many of the same reasons related to publicly traded companies. Also, certain valuation multiples from comparable companies can included or omitted to achieve the objectives of the valuation and minimize those that conflict with the objectives.

Application of Discounts or Premiums: the use of discounts such as illiquidity and minority discounts or a premium for control are more typical in private company valuations for shareholder disputes, income taxes and other disputes. Since there is limited objective information on discounts and premiums, a valuation conclusion can be subjectively decreased or increased by using subjective adjustments for various situations.

Responses to Bias

Corroborate Forecast Inputs: when estimating growth rates in revenues, factors like industry growth rates and market share should be considered. Independent information that conflicts should not be dismissed but rather used to stress test the forecasts. For example, a business may be expected to grow faster than industry average during the short to medium term but over the long-term, businesses tend to revert to the average in the longer term. To address bias in normalized financial results or where there is a limited history of operations, to the extent possible, the historical profit margins as a percentage of revenues should be corroborated with independent industry evidence for reasonability.

Corroborate Valuation Inputs: to the extent possible, other valuation inputs that have a material impact on the valuation should be based on objective verifiable information. This includes historical information related to inputs such as working capital and capital expenditure requirements and market-based information related to calculation and selection of discount rates. While historical data specific to the company is usually strong evidence for inputs such as working capital and capital expenditures, industry data should also be utilized where there is limited historical evidence or data available in an early stage business.

Cross Check the Results: where possible, a secondary valuation approach should be used to ensure the valuation conclusions from the primary valuation (typically a cash flow based method) approach are reasonable and consistent lending further support to the inputs and assumptions used in the primary valuation approach. This typically involves comparing the valuation multiples of a businesses with those of other comparable companies or to prior transactions in the shares of the subject company and if properly carried out, such an analysis can help stress-test the primary valuation method.

Valuation Range: any value that is obtained for a business is first and foremost an estimate and as accordingly should be quantified as a range of estimates to accommodate the inherent margin for error. This can be based on application of multiple scenarios and or presentation of a best-case (high) and worst-case (low) estimates of value. The output that is presented should reflect the estimates of value and the inherent uncertainty of those values.


Bias in valuations cannot be eliminated as there will always be inherent estimation uncertainty from the forward-looking nature and many assumptions used. However, building better valuation models that effectively use available objective and independent information is an effective way of addressing the bias and the uncertainty arising from macroeconomic, industry and company specific conditions.

Contributed by Michael Frost, CPA, CA, CBV, from Mowbrey Gil. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.

Zero-Emission Vehicles

Since March 19, 2019, companies that purchased zero-emission vehicles (such as an electric vehicle) have been able to benefit from attractive tax incentives. In Bill C-97 (first budget implementation bill of 2019, second reading of April 30, 2019), the Canadian Department of Finance added two new depreciation categories for zero-emission vehicles. Here is an overview of the new measures.

The vehicles covered are motor vehicles (as defined in subsection 248(1) of the Income Tax Act) which are acquired new and ready to be used after March 18, 2019 but before 2028 and which are entirely electric or hybrid vehicles that can be recharged with a battery of at least 15 kWh or that are powered by hydrogen. In addition, at the time of acquisition, the company must not have received financial aid for the purchase from the Canadian government under the federal purchasing initiative announced on March 19, 2019 as part of the budget for acquisitions made after May 1st, 2019.

Eligible vehicles may be registered under Class 54 (30% CCA rate) for passenger vehicles, or Class 55 (40% CCA rate) for taxis and rental vehicles. The inclusion of Classes 54 and 55 is not mandatory; therefore. the company could choose (under subsection 1103(2j) of the Income Tax Regulations) to register such vehicles under Class 10, 10.1or 16 depending on the circumstances.

As with Class 10.1. a limit of $55,000 plus tax applies to the capital cost that is eligible for capital cost allowance (CCA) for Class 54 vehicles. This new limit of $55,000 will be re-evaluated annually.

However. unlike Class 10.1, Class 54 does not include a separate category for vehicles whose cost exceeds the $55,000 limit. In addition, a final recovery or loss must be calculated when a vehicle included in these new Classes is sold. To this effect, subsection 13(7)(i)(ii) of the ITA includes a new calculation for proceeds of disposition. Proceeds will be calculated as the ratio of the capital cost registered in the Class at the time of acquisition (i.e., a maximum of $55,000 for 2019) divided by the vehicle’s real acquisition cost. This will reduce the proceeds of disposition according to the capital cost limit of $55,000.

Along with the new rules on the accelerated investment initiative, vehicles in Classes 54 and 55 may be eligible for an accelerated CCA rate of 100% the first year after acquisition. This measure will be progressively abolished between 2024 and 2028.

Finally, these new measures will affect the Excise Tax Act. The 2019 budget proposes a modification of the GST/HST rules in order to increase the input tax credit limit to $55,000 for businesses that have acquired a zero-emission vehicle eligible for the new rules described above.

As mentioned previously, on May 1, 2019, new business purchasing initiatives were added to these new measures. The Transport Canada initiative should make it possible to obtain a rebate of $2500 to $5000 on the purchase of an electric or hybrid vehicle if the MSRP is less than $55,000 for six-passenger vehicles and fewer, and $60,000 for vehicles for seven or more passengers. Some provinces also offer purchasing initiatives similar to the federal ones.

All in all, these new measures will certainly make zero-emission vehicles more affordable for businesses and will encourage them to make the transition to green energy.

Contributed by Caroline Galipeau. M. Fisc., and Marcil Lavallee. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.

Valuation Reports Are Not All Equal

Once it is determined that an independent valuation is needed, business owners and legal advisors are often unsure what the deliverable should be to meet their needs. When a Chartered Business Valuator (CBV) is engaged to act as a valuation expert where there is an expectation of independence , the CBV typically provides an expert report containing an independent professional conclusion. In doing so, the CBV exercises significant professional judgment and employs his/her experience and independent research. Valuation reports prepared on objective basis are defined by the Canadian Institute of Chartered Business Valuators (CICBV) as follows :

Calculation Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on minimal review, analysis and little or no corroboration of relevant information, and is generally set out in a brief Valuation Report;

Estimate Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on limited review, analysis and corroboration of relevant information, and generally set out in a less detailed Valuation Report; and,

Comprehensive Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on a comprehensive review and analysis of the business, its industry and all other relevant factors, adequately corroborated and generally set out in a detailed Valuation Report.

When is a formal report actually required?

The general rule is that if a CBV is providing a value conclusion in writing, the CBV professional standards mandate that it is required to be in a formal report – schedules presented on their own are not appropriate. The CICBV standards do not apply to any type of verbal discuss ion whether it be commenting on proposed values or assisting in a negotiation.

Level of Assurance

When is a Calculation or Estimate report sufficient or when in a Comprehensive report required? In general, the level of assurance provided by each report increases as it moves from a Calculation report to a Comprehensive report. Corresponding with this is the effort and fees required to provide the increase in assurance.

General Types of Analysis and Extent of Work Performed

The difference between the three report alternatives is largely the depth of analysis and disclosure as opposed to the breadth of the analysis or scope of review set out as follows:
Calculation reports are inherently limited in that they involve a simplified approach to valuing a business. An Estimate or Comprehensive report allows for more investigation into the critical value drivers of the business which will provide a clearer indication of a company’s value, assuming the required information is available.

How to choose?

Consider the context and risk of the situation. Who are the users of the report? How likely is the valuation conclusion to be challenged by another party such as the courts, tax authorities or other third parties? Is the exposure of the report low or high? What is the level of information available? The valuation report should be credible for the intended purpose. Each of the valuation reports options and the circumstances when each may be appropriate is as follows :
Retaining a CBV and determining the type of report that meets the needs of all stakeholders involves a number of key considerations, including the nature and size of the subject company,  the level of public exposure in terms of users, how contentious is the matter and the availability of information. As the level of assurance increases, so does the complexity and hence the professional fees required. A formal valuation might not be needed in all situations, but when it does, it should meet the needs of all stakeholders.

Contributed by Michael Frost CPA. CA. CBV, from Mowbrey Gil. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.