Why Knowing the Purpose of the Valuation Engagement is Important

There are many reasons why you may need to determine the value of your business. Some of the more common examples are marital dissolution, litigation and ownership disputes, buy/sell agreements, business and estate planning, and gift and tax planning purposes. Examples of the common users of a valuation report are the company shareholders, potential purchasers, the Courts and the Canada Revenue Agency (“CRA”).


A valuation report prepared for one purpose is not necessarily appropriate for another purpose. The purpose for which the valuation report was prepared can have a significant impact on the determined value and whether or not it will be accepted by the users of the report.

Understanding the purpose of the valuation report will, amongst other things, help you determine:

The Valuation Date

The purpose of the valuation will have an impact on the valuation date.

The valuation date for family law purposes will usually be the date of separation, while the date of valuation for business planning can be any date the business owner chooses. If a business owner determines the value of their business as of December 31, 2018, they may not be able to use this valuation report for family law purposes, where the date of separation may be October 20, 2016. Typically, the CRA will not accept a valuation report with the valuation date greater than one year old as values can change significantly over time.

The Need for Valuation Analyst to be Independent

If the valuation is for business planning purposes and the valuation analyst is serving as an advisor to the business owner, the valuation analyst may not be considered independent and therefore, the report being issued would be considered an Advisory Report not a Valuation Report.

An Advisory Report is not considered a valuation report by the CRA, the Courts or under the standards of the Canadian Institute of Chartered Business Valuators. These governing authorities require the valuation analyst to be independent for the report to be considered a valuation report. Therefore, the report would not be acceptable for family law purposes, CRA purposes or for litigation purposes.

The Standard of Value

Relying on the wrong standard of value can result in very different values. A valuation report prepared for income tax purposes would use the fair market value (“FMV”) standard of value. However, a report prepared for shareholder oppression purposes would rely on the fair value standard. The fair value standard, typically, does not allow the application of discounts for lack of control, while FMV typically does.

Determining the value for shareholder oppression purposes using FMV as the standard of value could possibly result in the dismissal, by the Courts, of the value determined in that valuation report altogether.

Type of Valuation Report

In Canada there are three recognized types of valuation reports and the reports are distinguished by the scope of review and analysis, the amount of disclosure and the level of assurance.

The Comprehensive Valuation Report provides the highest level of assurance and can be compared to the Audit Report for financial reporting purposes. This report is used where there are going to be a significant number of users relying on the report and/or the reason for the valuation is due to a contentious litigation matter.

The Estimate Valuation Report provides a level of assurance that is less than the Comprehensive Valuation Report and is equivalent to the Review Engagement Report for financial reporting purposes. This report is used where there are going to be a significant number of users relying on the report and/or the reason for the valuation is due to a contentious litigation matter.

The Calculation Valuation Report provides the lowest level of assurance and is equivalent to a Compilation Report for financial reporting purposes. This report is typically used for planning purposes or for making preliminary interim assessments in an extended matter.

Due to the scope of analysis and review, the value determined by a Calculation Valuation Report may be different than the value determined by an Estimate Valuation Report and a Comprehensive Valuation Report. The report may not be accepted by some or all of the users.

Valuation Discounts

Is the interest being valued a controlling interest or a minority interest?

Typically, when a valuation is prepared for litigation purposes, and the fair value standard is used, a discount for lack of control is not applied. If a valuation is done for CRA purposes and the related transaction is non-arm’s length, CRA may not allow a discount for lack of control. Whereas for all other non-court or CRA valuations, a discount may be appropriate.

The application of a discount for lack of control will usually have a significant impact on value.

As shown above, the purpose of the valuation report can have a significant impact on the determined value and whether or not it will be accepted by the users of the report. Therefore, preparing a valuation report for one purpose and using it for another can be costly to the owner of a business. Accordingly, all the items discussed above should be understood before the engagement starts and summarized as part of the Engagement Letter.


For more information on this topic, please contact your McCay Duff advisor.

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   Business Advisory, Business Valuation, Tax Planning
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