All About Valuation | Part 3: How much will my valuation cost?

That is one tough (and fair) question. But like many things in this world, it depends. 

Pricing out a valuation is like buying a car. Do you need the Cadillac, the heavy-duty pick-up truck, the economical hatchback, or would a bicycle do?  It is impossible to know what the car will cost until you know what is needed and why you need it. 

After 30 years of providing valuations in over a thousand valuation assignments, my goal is to continue to provide the greatest value to you.  That means using all of my resources (staff, industry experts, research material) most effectively and giving you exactly what you need, as opposed to giving you the cheapest fee quote up front for a level of service that may be deficient.      

  1. The Quote for Valuation Services

There is a wide range of fees and options. These fees and options depend on four key criteria (the “four key criteria”):

  1. The purpose of the valuation
  2. The financial snapshot of the business (assets, liabilities, and income);
  3. The operational snapshot of the business (employees, customers, competitors)
  4. The industry that your business competes in

(a) Purpose

The purpose of the valuation is key, as it measures intent and risk. 

    • A valuation for tax purposes (say for a corporate tax reorganization) is generally low risk, without the need for a comprehensive analysis. A basic valuation report may be all that is required. 
    • Moving up the scale of risk and intent, a valuation may be needed for a transfer of ownership from one generation to the next. Parties may be dealing with some serious business issues that require hard thinking and serious analysis to ensure each party is being treated fairly. A valuator, after consultation with the business owner, may choose to undertake a report or analysis that will focus specifically on one or two key issues most relevant to the vendor and potential buyer. The value of research material such as industry and transaction data becomes more important as risk increases.
    • Finally, when it comes to risk, any valuation or financial analysis that involves litigation, such as a shareholder dispute or divorce, can be significantly risky and costly. Errors in judgment or omission can cost you major dollars in both damages and lawyer fees.  A cursory report could be a waste of money in a litigation, and in fact, can cost you far more in damages, lost opportunity, and lack of credibility. It may not be the message every litigant wants to hear, but a poorly analyzed (and cheap) report will cost you far more than a thoughtful and well-researched valuation analysis.

“We believe in communication, from day one, because communicating key points to lawyers and clients gets files settled.”

All that being said, I and everybody at Welsh Valuation follows one underlying principle, and that is to get to the heart of issues very fast. That’s how we maximize value for you. We believe in communication, from day one, because communicating key points to lawyers and clients gets files settled. We have over a thousand assignments proving that out. We believe in identifying the big dollar issues and focusing our efforts on these key points. Paper shuffling costs the client, both in money, aggravation, and time.  We refuse to operate that way.

(b) Financial assets and liabilities

A review of the financial assets and liabilities of the business, and the income or cash flow derived from that business, is the necessary first step when calculating the value of a business.   

Before I quote for work, I always ask for the last set of annual financial statements in order to size up, in my mind, what assets and liabilities have been invested in the business to date, what returns are being generated, what is the financing to support on-going operations, what are the trends going forward, and how would a potential buyer look at value. These financial statements also inform me of how up-to-date the financial information is and whether I will need to rely on the client’s internal records for additional financial data. 

(c) Understanding the basic business operations

The three questions that I always ask are, “who are your key employees?”, “who are your customers?” and “who is your competition?” Your key employees, customers, and competitors tell me quickly about the risk and opportunities of your business, and it informs me as to how knowledgeable and familiar my client would be regarding the business operations. It should be remembered that a likely buyer for any business is most often found amongst its own employees, its clients, or its competition. Therefore, my valuation has to immediately identify and address these three key questions.

In summary, I am here to give you options and to tell you (accurately) what it would cost to do the valuation. Without financial statements and without knowing the answers to my three basic questions, it leaves me, as it would any valuator, to guess at what is behind door number two.  I’m here to give you an effective valuation, without surprises.      

(d) Industry

Value is always based on future expectations, not on a formula based on the past results. One only needs to look at the stock market to understand that stock values vary tremendously over short periods of time because of changing expectation. Private markets are no different, so it is vital for you to feel confident that I will spend the time to truly understand what makes your business tick and what are the risks associated with the industry that your business competes in.

There are thousands of different businesses and industries. In sizing up a valuator’s ability to help you with your particular needs, my suggestion is to look for broad business experience over a long period of time, and in my case, that means over a thousand valuation reports and consultations involving oil and gas, real estate, manufacturing, large and small retail, services, distribution, finance, to name a few. It also means testimonial experience in litigation and the credibility and expertise that has been proven in Court. I can apply my broad experience gained with similar clients to your situation, and to do that effectively and quickly.    

  1. Additional Helpful Hints to Manage Costs Effectively

(a) Qualifications

Hire qualified people, it is as simple as that. Qualifications mean a CBV (Chartered Business Valuator), and in addition, I would encourage you to hire a valuator with another business-related qualification such as a CPA (CA, CGA, CMA), MBA, or CFA.

There are lots of “valuators,” but unfortunately, there is no effective oversight preventing anyone from calling themselves a valuator. In my opinion, a real estate agent or business broker or tax accountant is not equipped to properly value your business unless they have a CBV designation. Having expertise means extensive training and professional development, theoretical knowledge, practical experience as a full-time valuator, access to a library of research material on private market valuation issues, and broad business knowledge to think in unique ways. You accountant shouldn’t dabble in valuations, no more than I would dabble in income taxes. Finally, business brokers and real estate agents are out to build a book of listings to squeeze out commissions, it is a very different business model than how a CBV charges for their services.

(b) Valuation in Stages

A valuation is a process. Once you have started, it does not mean that we must carry every valuation to the end product, being a full written and detailed report (which includes a number of written pages and numeric schedules). 

I often get calls from clients needing something less. Sometimes clients are looking for verbal advice, or to get affirmation about a valuation issue. CBVs have flexibility to consult on an informal basis, as advisors.  Many clients prefer to employ our services over a specific block of time, and once that time is given, they will then decide how they would like to use us further. Sometimes, all that may be required could be an advisory meeting or a review of select documents. 

As the client, you are ultimately in charge of the level of work you wish us to undertake. However, in response, we will not put out a product that is deficient and fails to serve your purpose and needs.

(c) Price

As we noted earlier, there is not a single price for a valuation. When I quote a fee, I think of my time as a cost to the client. I have no difficulties outlining my charge-out rates and the rates of others in my firm who may assist on your project. There are always new things discovered during a valuation, and I make decisions to utilize resources based on getting an appropriate and fair valuation in the most efficient way. We will not skip important analysis or make uninformed assumptions just because the budget won’t allow it.

Within your control is the gathering of financial information. Inaccurate or incomplete accounting information slows the valuation and results in greater costs and paper shuffling. I hate paper shuffling, so you can expect a call from me if the information being gathered is not accurate, timely, and complete. The ability to contain costs depends on timely communication, and that means discussions between me, you, and your accountant.

For a single business entity of a moderate size, say revenues of $1 to $10 million and few capital assets, a typical cost of a basic valuation calculation report (10 to 15 pages of writing plus schedules) start in the range of $7 to $10 thousand, assuming clean and accurate accounting records, and that the report is not being used for litigation purposes. More than half of my projects are in that price range. However, for a quote you can rely on, we need to assess the three key criteria noted earlier in this blog.

  1. Summary – Providing Value

Our business, Welsh Valuation, and my personal reputation has been built on 30 years of excellent referrals. Valuation services are costed out on an hourly basis, similar to accountants and lawyers. What delights me is that most of our business comes from accountants and lawyers, and on a regular basis, my referrals go out of their way to tell me that they use Welsh Valuation because of the personal service and because our rates are very reasonable. In the end, that is how you provide real value.   


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All About Valuation | Part 2: What the valuator should be asking you

In my previous post, I highlighted some of the key questions you should ask a valuator before you engage them, but that’s only half the equation. Below are some of the questions that you should expect your valuator to ask of you, and sure signs that they know what to look for when beginning the valuation process.

Why do you need a valuation?

Tax, litigation, divorce, the potential sale of your business? The purpose of the valuation dictates the extent of work that might be necessary, but your valuator should give you options (different levels of detail at different prices). There are different types of valuation reports, depending on your needs.

A valuation report is a formal document that consists of many written pages, which describe the business being valued, the scope of information and major assumptions relied upon, an analysis of the company and the industry, an analysis of key success factors, an analysis of special and unique issues, an outline of the valuation methodology, the determination of cash flows and tangible asset values, the reasoning behind valuation calculations, and a summary of the conclusions.  There are usually many numeric schedules that accompany such a report.  A well-written valuation report should be detailed, yet clearly laid out such that a business person would understand how value was derived. 

Understanding the purpose of the valuation is the key for allowing me to give you the appropriate level of service at the most effective cost point.

“Taking shortcuts can limit the effectiveness of the valuation report and can lead to credibility issues…”

For example, a valuation report needed for litigation matters or divorce matters can quickly lead to an expectation of detailed analysis. Taking shortcuts can limit the effectiveness of the valuation report and can lead to credibility issues once that valuation report is being dissected by a sharp and persistent lawyer. It may be important, and necessary, to up the level of detail in a situation where strife and lack of trust is a major issue. A qualified valuator, like myself, should ask the right questions in order to fully understand your situation and make an educated recommendation on the appropriate level of analysis required. For litigation purposes, I usually recommend a more detailed “estimate” or “comprehensive” valuation report, especially given my years of experience in dealing with all sorts of difficult litigious situation.

On the other hand, a valuation needed for tax purposes or for internal shareholder transactions is usually a less risky proposition, especially if tax practitioners have price adjustment clauses in a tax reorganization. Valuation reporting standards allow a CBV to prepare a less detailed “calculation” valuation report. The “calculation” report will result in a lower fee for the report, but such a cursory report is inappropriate for most litigation situations. 

In some cases, a formal, written valuation report may not be required at all. For example, in a purchase or sale of a business, industry knowledge and challenges may be readily acknowledged and accepted by both the buyer and seller. Therefore, time spent on drafting a detailed industry and/or economic analysis, maybe totally unnecessary.

Instead, my clients have found it far more useful for me to focus on analyzing specific issues of concern and identifying opportunities that make or break a transaction. An informal consultation can be much more effective in a situation where creative thinking and timely responses are needed.

Can you provide the year-end financial statements for the past fiscal year?

In my practice, I can’t provide a proper fee quote without reviewing financial statements, it is as simple as that. Financial statements outline the tangible assets and liabilities of the business, summarize historical cash flows, and provide an overview of the financing of the business – all in one brief and consistent format. The advantage of financial statements is that they are readily available.

A review of the financials allows me to ask smart questions, to identify the cost to complete the valuation, and to understand the important issues that will have to be addressed in the valuation report. Financial statements allow me to assess the materiality of expenses and identify unusual financial trends.

Knowing the purpose of the valuation, combined with the size and breadth of the business, I can assess the important valuation issues and decisions to be made instead of spending time chasing down unimportant or immaterial discrepancies that add little to the usefulness of the valuation report itself.

How do you earn your revenue? What do you sell?

I love the variety that business valuation consulting provides, and I’m always eager to know what makes your specific business tick. If I fail to ask basic operational questions up-front, then how can I determine the key issues and give you an appropriate fee quote and timeline? Inquiries about the revenue streams and core service points of the business allow me to be more cost-effective and to access and use my experience with similar businesses in order to identify opportunities for you.

What is your timeline?

Is there an urgency to complete the valuation? Usually, it is difficult to complete a full valuation report in less than a month, especially given that it often takes a couple of weeks for the business to gather the necessary information that will be required to even begin the valuation. I need to align what’s possible with your expectations before any work gets started.

The right questions are sometimes the ones that seem obvious, which is all the more reason to ensure both you and your potential valuator are asking them. Look for an accredited CBV, with years of full-time experience, that can answer your questions, knows your industry, and seeks to understand your business before you engage.

Welsh Valuation goes far beyond just asking the right questions.

Connect with us to find out how.


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All About Valuation | Part 1: What you should ask a valuator before engaging them

You’re a business owner or operator and, for one of many potential reasons (tax, litigation, a potential sale, etc.) you’ve decided you need a business valuation. Identifying the need is one thing, but identifying the right fit is another. Before you engage a valuator, there are a few key questions that you should ask to make sure they are the right person for the job.

1. What valuation experience do you have working with my industry?

If your business operates in a major industry segment, then you should expect your valuator to have relevant industry experience. Clearly, oil and gas experience is important in Alberta, but other key sectors include real estate, distribution, retail, professional services, agriculture, trades, and manufacturing.

Look for a broad range of full-time experience. Say you’ve got an ostrich farm, it’s not important that the valuator has experience in valuing ostrich farms, not many valuators have. Instead, ask the valuator about their broad industry experience and knowledge. Ask the valuator about industry issues in order to test their general knowledge and ability to apply their experience to your particular situation.

As well, ask your valuator about all the services they provide. Often, there are salespeople, consultants, or real estate agents who dabble in valuations but have no specific training, and they don’t make a full-time living being a professional, accredited business valuator. Does your valuator have the appropriate professional designation, a Chartered Business Valuator (CBV) as accredited with the Canadian Institute of Chartered Business Valuators? If you want a defensible valuation you can trust, ensure your valuator has the right experience and qualifications.

2. What are the various levels of services provided?

Usually, valuation services are billed on an hourly basis, but the valuator should also exhibit some flexibility in pricing to reflect the size of the business being valued and the financial circumstances of the shareholders. Valuators should be willing to outline their charge-out rates and the rates of others in their firm who may work on a project.

It’s a cost-competitive environment, so getting a low quote may be satisfying, however, the lowest up-front quote doesn’t mean the ultimate invoice will be less when hourly rates are applied. Most valuators are not going to give you a firm price up front. As valuators, we are heavily dependent on the quality of the information provided by the business being valued. There are always new things discovered during a valuation, and a valuator should be making decisions based on getting an appropriate and fair valuation in the most efficient way, not skipping important analysis or making uninformed assumptions just because the budget won’t allow it.

That said, if a client can provide the most recent year-end financial statements, a valuator should not be averse to providing a quote for services (a fee range), assuming clean accounting records and a timely provision of all accounting information requested by the valuator.

See more about the cost of valuations will be discussed in part 3 of this series (coming soon).

3. When will the report be completed?

Before a valuation can begin, valuators require a list of basic financial information which they will request from you, so being prepared is key to avoid unnecessary delays. We set a proposed date at the beginning of the valuation based on when the list of required information is provided to us. In general, it usually takes about a month to prepare a formal business valuation report, but expect that timeline to vary depending partly on how quickly you can supply the required financial information.

If you’ve found an accredited CBV with relevant industry experience and the timeline works, then it’s likely time to engage. The biggest thing you need to look out for is whether your CBV is asking you the right questions, something I’ll cover in the next chapter of this series. 


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What public market data can tell us about the valuation of private companies

Academic researchers and market analysts like public market data because it comes from the unbiased open market where value is continually assessed on an arm’s length basis by a large number of potential investors, and because it is readily measurable for most liquid, minority interests.

It is tempting and relatively easy to use financial or valuation ratios from public market data as a basis for deriving a market value for a private company. However, such an approach is difficult to apply in practice, and we discuss those difficulties in section A below.

Although an analysis of public market data may not be useful for valuing comparable private companies, such an analysis can tell us a lot about the behavior of investors and underlying valuation principles, which apply to every private market transaction.

  1. Is public market comparative data useful for valuing a private company?

Generally not[1]. Briefly, our reservations can be summed up in three broad categories:

  1. Public companies generally have larger business operations and geographic coverage. Numerous academic studies in public markets show that size matters, and that shares of larger companies are generally less volatile than smaller companies. Applying public company multiples and valuation ratios to a private company only make sense for private companies with a sufficient size to rival comparative public companies.
  1. A majority of public companies have segmented business operations that reach beyond one specific industry niche. As an example, we recently undertook a valuation of a major distributor of a particular type of construction material. Our client had the size to attract a number of public market buyers, but we could not find a single public company with comparable scope of product and clientele. It seemed that comparable companies were either privately-held (like our client), or the comparable public companies had a much broader range of business operations. These comparative companies were either distributing a wide variety of wholesale products to different markets, or they were operating in the retail market and not as wholesalers.
  1. Even if the issues in point 1 and 2 could be overcome with that perfect comparative company and available data, we believe that there could be a wide variation in results.

Recently, we undertook the valuation of a substantial privately-held drilling company with drilling and service rigs located in a number of international locations. Although this company was a private company, we did look at public market valuation ratios for three “comparable companies” that were similar in scope, size, and services.


Frankly, I was skeptical as to the usefulness of this analysis. In our experience, we have generally found that comparing select financial and valuation ratios to public companies in similar industries does not yield an appropriate precision or measurement of market value. 

In this situation, we found our experience to be confirmed, but some interesting observations arose that impart a lesson for all those seeking a valuation of their business.

  1. Comparative data – a real life example

In our real-life example, three comparable, publicly-held drilling companies were identified, consisting of Trinidad Drilling (TDG), Western Energy Services (WRG), and Akita Drilling (AKT).

Table 1 data includes:

  1. Fundamental data – oil prices, revenue, and EBITDA[2]
  2. Common valuation ratios – enterprise value to EBITDA (EV/EBITDA)[3], price to revenue[4], and price to book[5]
  3. Month-end closing stock price
  4. Briefly, in 2012 and 2013, oil prices were historically strong, with WTI in the $90 plus and $100 US plus range. During the last half of 2014, oil prices rapidly declined and the industry has struggled in 2015 and 2016. The financial data and valuation ratios reflect the market prior to, during, and immediately after the decline in commodity prices. As well, given the sudden decline in commodity prices, we plotted changing stock prices, by month, for the last six months of 2014 (in Table 2).

    1. Three major observations to be made when valuing a private company

     Observation #1 – Value is at a point in time, it can change rapidly

    From July 2014 to December 2014, stock prices for TDG decreased 51%, WRG decreased by 43%, and AKT decreased by 24%. Value changes rapidly. 

    I have found that many private company shareholders are slow to acknowledge value changes to the downside. In public markets, value can dissipate quickly – just ask shareholders of Yellow Pages Media, Nortel, or Pengrowth. The market values for these companies changed due to rapid economic disintegration and changing economics.

    Could change have been anticipated? Maybe, but the point to be made is that equity investments come with risk. This risk is amplified for private companies who operate on a smaller scale with greater dependencies on certain customers and/or suppliers, dependencies on key managers or employees, or who operate with a limited range of products.    

    A business valuation worth paying for is a valuation that focuses on risk, not just returns. Risk assessment includes an analysis of the market, the product, the competition, management, and the underlying economics. Just because a private investor made an investment in the past, at a certain price, has little or no bearing on the value today.   

    It is easy to take some numbers, apply a rule-of-thumb multiple, and arrive at a private company valuation, without any market context. However, a failure to consider current market circumstances is a real limitation and it ignores market realities and fundamental business risk.

    Observation #2 – Value is prospective, not historical

    For our comparable companies, while they were experiencing a rapid decline in stock price in the later half of 2014, the historical revenues and EBITDA were still increasing or remained the same. 

    From 2013 to 2014, for our three comparable companies, average revenue grew 16% and average EBITDA grew 7%. Yet, over that same time period, the closing stock price decreased by an average of 29%. Simply put, stock market prices (values) did not move in line with historical operating results.

    This may seem like common sense, but it is clear that market prices move based on what is anticipated, not based on historical performance. This observation applies to both public and private companies.

    If share prices only reflected historical results, then one would expect valuation ratios to be relatively consistent, year-to-year, especially for well-established companies with small operational changes. EV and EBITDA would move in line, as would stock price to revenue and stock price to book.

    However, in looking at annual changes in our basic valuation ratios (EV/EBITDA, price to revenue, or price to book) in Table 1, it is clear that the range of valuation ratios can change wildly and are moving independently of historical results during times of rapid change.

    As a valuator, I look at historical results as telling a story. It shows how a company’s fortunes can change as markets change. History helps identify the key areas of uncertainty and risk, and it helps identify potential questions and discussion points in order to better understand the business that is being valued and to identify dependencies upon key customers, suppliers, or product lines. History will show revenue and expense relationships that may be useful in order to project future performance. But of itself, history does not measure value. 

    Hence, any quick and dirty valuation of a private company that only applies a rule-of-thumb to historical results is, again, potentially unrealistic and unreliable.

    Observation #3 – Value is not precise

    We prepare private company valuation reports for investment purposes (buying or selling), for tax reasons, and for legal reasons (for judges, lawyers, and litigants). In the end, a conclusion must be drawn, and although we try our best to identify all key points and draw specific conclusions, undertaking a business valuation is not a precise science.

    The public data in Table 1 shows that for any ratio, for any given point in time, that there are variations in the valuation ratios. These variations result from the unique circumstances of each company. For example, in 2013, the EV/EBITDA valuation ratio ranges from 5.7 to 12.17. That is a significant variation in a highly relevant valuation ratio.

    As we draw our conclusions, valuators usually identify a range of value. That range may vary by 5%, or 10%, or even 20% in value. In our experience, especially in a litigation setting, litigants get carried away in the mechanical accuracy of the calculation, but I think that often misses the point. 

    A valuation is not a mechanical exercise but a thought-provoking analysis. Does the valuation make common sense? Is it logical? Does it cover all the key points? Does it indicate an understanding of the business opportunities and risks? Finally, as a hypothetical investor, would you invest in that business at that determined value?

    1. Conclusion

    Although this brief analysis dealt with three oil and gas drilling companies, the same analysis and concerns apply to almost every private company business valuation in every industry. Market comparatives are generally not relevant, or at best, should only be a secondary check where value is derived from one of the mainstream valuation methodologies.

    Instead, I encourage valuators and their clients to think beyond a formula to what makes common sense. Focus on risk assessment and understanding both the client’s operation and the market in which the client competes. Such an approach leads to better and more useful valuations.

    [1] Academic research into the application of public market data to determine the cost of capital for private companies is relatively complex. This article is not meant to detail such research and complexities.  Instead, when we refer to comparative data, we are referring simply to commonly-applied financial ratios used in business analysis and valuations.

    [2] EBITDA – earnings before interest, taxes, depreciation, and amortization

    [3] Enterprise value – market value of share equity and long-term debt combined

    [4] Price to revenue – market capitalization value compared to company revenues

    [5] Price to book – market capitalization value compared to net book value of company assets minus liabilities

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Seeking value – Observations from 30 years of business valuation and financial litigation experience

Thirty years of business valuation and financial litigation expertise, with likely over one thousand assignments, translates to gray hair and some fuzzy eyesight. However, it also allows you to develop a nose for what smells right and what doesn’t. You ask questions because you want to know more. You remain passionate about your business and the business of others. You value relationships and being connected, and you know that you are valued for what you know and how you educate and inform others. You know things are rarely black and white, and instead, you have to be comfortable working in the gray. You love the challenge of applying a vast array of experience and knowledge to new and unique circumstances.

I’m writing blogs because I feel I have so many things to contribute to our profession. I see a real need for business valuation expertise amongst small and mid-sized business owners and entrepreneurs. Besides all of that, I surround myself with smart people, with skills that are unique and slightly different than mine. As such, our entire team will also be making contributions to this knowledge portal in their areas of expertise.

In the end, we don’t admit to having the answers to everything, but we have seen too many situations to know that cookie-cutter approaches to valuations and sell-side advisory services lead to misinformation and poor business decisions. We hope that our candid and frank discussions will be informative and that the articles you see published in this knowledge portal will help you build a better business and set you up for success.

Come join us for the journey.

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Notice to reader: The comments contained in our blog posts are general thoughts gained over years of experience in valuating and consulting with private companies. In reality, there is a wide spectrum of situations and circumstances, as broad as the number of business, industries, and individual circumstances that one may encounter in business valuations and sell-side advisory services. There are no rules or common professional judgment that is applied equally to every situation. We caution any reader of our blog that no valuation conclusions are being provided, and no reliance should be placed upon the comments contained in our blogs for any business decision.