The Documentation Required to Prepare a Business Valuation in a Litigation Context: Why and To What End?

This article was originally published in French on Droit-Inc.com  

When a dispute arises that requires assessing the value of shares of an SME’s non-executive shareholders, or the value of an SME for a third party, outside parties often have limited access to the company’s financial data. However, when it comes time to assess the company’s value, much of that financial data is crucial in enabling the expert to establish market value.

Executive shareholders are sometimes resistant to share financial information in this type of situation. Whether such shareholders like it or not, the following documents must always be provided:

Financial statements from the last three fiscal years and the most recent interim financial statements: The basic financial information these documents contain is usually the starting point for a business valuation.

Budget for the next fiscal year and projections for the coming years: A business valuation is conducted prospectively. The information contained in the budget and the projections provide a forecast of the direction of earnings and profits.

Corporate income tax statements (including all schedules) for the most recent fiscal year: They contain pertinent information, such as the tax cost of certain financial assets, tax credits balance and losses carried forward, any existing associated companies or related parties, etc, which are used in the business valuation.

Shareholder agreement: It contains information such as how to repurchase shares, buyback formulas, restrictions on share distributions, etc., which impacts a company’s value and or the negotiability of shareholders’ interests.

Loan agreements: In order to establish the company’s future financial commitments, and it contains information regarding creditor requirements and restrictions that affect the company’s ability to distribute its earnings, as well as its value.

Copy of leases: In order to verify whether the business location will be available for multiple years and whether there are renewal options.

Details of advances to related parties and transactions between related parties: In order to ensure the reasonable nature of non-arm’s-length transactions and to make adjustments as needed, should these transactions artificially inflate or decrease profits.

List of passenger vehicles registered to the company name over the last three years and the names of the main users of these vehicles: To determine if any of the vehicles are excess assets that are not necessarily for company use, or if they are for personal use by executive shareholders or their family members, which would artificially decrease the company’s profits.

Summary of Remuneration Paid (T4), as well as T4 forms for the past three years: To see if executive shareholders’ family members are on the company’s payroll and whether the salaries paid to them are reasonable or artificially decrease the company’s profits.

Current life insurance policies: The amount of coverage roughly indicates the shareholders’ value to the company when insurance was arranged, in order to provide liquid assets to buy out a shareholder in the event of his/her death.

Access to the Minute Book: It contains the details of all of the company’s share capital transactions and indicates the value by shareholder.

Statements from business credit cards used by executive shareholders (and members of their family) from the last three years, as well as executive shareholders’ expense accounts from the last three fiscal years: In order to assess the amount of executive shareholders’ discretionary personal expenses being paid by the company and artificially decreasing its earnings.

Access to these documents allows the expert to analyse the company’s past and future performance and determine the typical profits to be capitalized in order to determine its worth. This list is not exhaustive, but provides the basic information that an expert should consult before accurately determining the market value of a business.

To learn more, contact Jean-Philippe Langevin, CPA, CA, CFA, CBV/EEE, at 514.228.7805 or [email protected], or your local MNP Business Advisor.