Business Valuations: Calculation, Estimate and Comprehensive Reports
No matter the size of your enterprise, knowing the value of your business will be important at many different times in its operating life. Whether you’re going through a financial reporting process, conducting stock option valuations, restructuring, or looking to sell your business, you’ll need a valuation report to tell you, and any third parties, what your enterprise is worth.
It’s important to know that there are three different types, or ‘tiers’, of valuation reports set out by the Canadian Institute of Chartered Business Valuators (CICBV): Calculation, Estimate, and Comprehensive. Each report has a different level assurance with the lowest level requiring the least amount of time to complete, and the highest level requiring much more time. As the level of assurance increases, so does the cost of the report.
Choosing the right report is heavily dependent on what you need it for. Let’s look at the different types of reports and which one would be the right choice the next time you need one.
A Calculation Report is the least detailed type of valuation report. It provides the least amount of assurance with respect to the value conclusion. This type of report is based on minimal review and analysis and little or no corroboration of relevant information. It’s important to note, however, that this doesn’t mean the report produced is of lower quality—it’s simply a quicker and higher-level analysis, which is generally set out in a brief valuation report.
Calculation Reports are often used when there will be less scrutiny around the valuation results, and when a full valuation engagement is not necessary. Calculation Reports are commonly used for internal reorganizations and estate freezes, but are generally not appropriate in a sale situation.
An Estimate 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. It’s generally set out in a less detailed valuation report than a comprehensive report, but more detailed than a Calculation Report.
Estimate Reports are commonly used for financial reporting purposes, or when there will be a higher reliance/level of scrutiny on the valuation conclusion. Examples of use cases for an Estimate Report would be a sale situation or in litigation.
A Comprehensive Report is the most detailed type of valuation report. It provides the highest level of assurance with respect to the value conclusion. This type of report is based on a comprehensive review and analysis of the business, its industry, and all other relevant factors. It’s generally set out in a detailed valuation report, and it requires the most time and resources to put together (leading to a higher cost for completion).
Due to the depth of analysis and level of expertise required to complete a Comprehensive Report, they’re often reserved for complex transactions where a high level of scrutiny is expected—such as take private transactions (where a public company goes private) or litigation.
Which report should you choose?
The type of valuation report you choose depends on your specific needs and circumstances. If you need a quick estimate of the value of your business, then a Calculation or Estimate Report would likely be appropriate. If you need a more accurate and detailed valuation of your business, then a Comprehensive Report may be necessary.
If you’re feeling unsure of which report you need, our team of valuation experts has the knowledge and experience needed to help make this choice for you. Contact your DMCL advisor and they’ll dive deeper into your valuation report options, outline which one would suit your needs best, and put the report together for you in a timely manner.
If you have any further questions about business valuations, be sure to refer to our comprehensive list of FAQs to get the full picture.
Article written by Chris Riccio, CPA, CBV