Business Valuation in Dispute Matters

Written By: and on BUSINESS VALUATIONS, FORENSIC ACCOUNTING NEWS

Business valuation is NOT just repeating a company’s net book value or net asset value. It requires an Expert to:-

  • analyse financial information;
  • conduct independent industry research;
  • understand company background, operation flow and management team;
  • consider factors such as revenue pipelines, economic factors, government policies, upstream and downstream industry;
  • consider valuation methodology(ies); and
  • most importantly make adjustments to book value or profit indicators.

The role of a Valuation Expert

Our Directors are often engaged as accounting experts to prepare expert witness reports for valuing a company or a group of companies (sometimes valuing the interest of one of or a few of the owners) (see our another published Select Experience regarding Business Valuation). Business valuation is one of the most popular and important exercises in disputes. We are appointed in two capacities namely Party Appointed Expert or Single Joint Expert.

All in all, as an independent valuation expert, our duty is owed to the Court and bearing in mind that valuation is not a re-auditing exercise.

It is important to note the difference of their appointment and instruction process. The Academy of Experts (UK) highlights the following observations:-

Party Appointed Expert

“The PAE’s Party Appointed Expert’s duty is to help the court on matters within their expertise and this overrides any obligation to the person from whom the expert has received instructions or by whom he is paid. The expert’s role is to provide unbiased opinions on matters within their expertise and should not assume the role of an advocate. The watch words for experts are independence, impartiality and integrity.”


Steps in Gathering Information

We undertake the following critical steps to gather information for conducting business valuations (note: in terms of communication, bear in mind a Single Joint Expert should be transparent to all parties at all times):-

  • Request for the most recent three years audited financial statements (preferably five years if possible) or three (or five) years preceding to the agreed valuation date;

  • Research the background and news regarding the subject company and the industry;

  • Review the audited financial statements and understand the principal business;

  • Prepare a list of specific questions to seek explanation and supporting documentation from the management of the subject company;

  • Meet with the management of the subject company to obtain more understanding regarding the subject company’s financial performance, going concern, profit/cash flow forecast, management team, risk factors, etc;

  • Seek further explanation and supporting documentation if necessary; and

  • Prepare an expert witness report.

The above steps are not necessarily exhaustive but serve as a minimum to ensure majority of the most relevant and significant information and factors are properly considered in arriving a conclusion.

More often than not, we are asked by the instructing party(ies) or opposing party(ies) to seek and consider certain information and documentation. As an independent valuation expert, our duty is owed to the Court and bearing in mind that valuation is not a re-auditing exercise. We would consider the relevance and significance of the information and documentation for valuation purposes before requesting the production of such.

Examples
Audited Financial Statements (AFS) or Management Accounts Financial statements are the starting point of business valuation. An AFS is always preferable as it provides a higher level of assurance of accuracy and contains important financial information of a company including principal business, assets, liabilities, profitability, cash flow, accounting policies, breakdowns, etc. However, management accounts are sometimes acceptable as an alternative in the following scenarios:
•companies incorporated in certain jurisdictions in which there are no statutory requirements for companies to have their accounts audited or even prepare any financial statements; and
•companies pending for annual audit.
Breakdown or No Breakdown Reviewing breakdowns of specific items can increase our understanding of its nature and recoverability (assets) and repayment urgency (liabilities). In normal circumstances, breakdowns of important items should be disclosed in AFS in accordance with reporting standards. However, for management accounts (the details of disclosure may not follow closely with reporting standards) and items in substantial amount, it is preferable to obtain detailed breakdown for more understanding.
Independent Valuation or No Independent Valuation It is preferable to obtain independent valuation for assets such as landed properties, and sometimes patents or trademarks. However, if the reported values were already adjusted to their fair value (based on independent valuations), a further valuation reports may not be necessary assuming the valuation date is close to the financial year end date.

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