Business valuation in Brazil

Purchases and sales of companies and equity interests, the entry of new investors, the admission and exit of shareholders, succession planning and corporate reorganisations are among the most common reasons. The report also serves Brazilian private equity funds (FIPs) that qualify as investment entities and therefore measure their investees at fair value, and boards that need an independent reference before approving a transaction.

In transactions governed by Brazilian Corporate Law and CVM rules, such as mergers and tender offers, and in shareholder disputes, the report follows specific rules, covered on the pages on valuation reports for mergers and shareholder exit valuation.

IVS 200 · IFRS 13 · CPC 46

For most operating companies, the primary method is discounted cash flow, which projects free cash flow and discounts it at the cost of capital. The result is checked against multiples of comparable companies and transactions. For holding companies, real estate companies and businesses in liquidation, net assets at market prices tend to be the more appropriate reference.

The cost of equity starts from a US dollar CAPM, with the US Treasury risk-free rate, country risk, the beta of comparable companies and the equity risk premium, plus a size premium where applicable. The rate is converted into reais using the inflation differential between the two countries.

The report sets out the business and industry context, the adjusted historical financial statements and the projections with the source of each assumption. It also presents the cost of capital build-up, the value under each method with their reconciliation and the sensitivities to the assumptions that move the result most.

The working papers document the report, with live formulas and a trail from every number to its source, so that any reviewer can rebuild the conclusion from the raw data.

The work starts by defining the purpose, the basis of value and the valuation date, which drive the method and the level of detail. It continues with the analysis of the financial statements, interviews with management on the business plan and the modelling.

When the company holds material real estate, machinery or intangibles, CBG's Real Estate Appraisal, Fixed Assets and Business & Intangibles Valuation disciplines value those assets on the same timetable.

The timetable is set in the proposal, based on the size of the company, how organised the information is and the purpose of the report. The kickoff takes place within two business days of engagement.

A book value report confirms the equity recorded in the balance sheet and is signed by an accountant. A business valuation estimates the economic value of the company, which reflects its capacity to generate cash and usually differs from book equity.

For most operating companies, discounted cash flow, checked against market multiples. For holding companies, real estate companies and businesses in liquidation, net assets at market prices tend to be more appropriate. The report explains the choice.

A multiple gives a quick reference, which depends on the choice of comparable companies and on adjustments for size, growth, leverage and liquidity. In the report it serves as a cross-check on the discounted cash flow and rarely supports the conclusion on its own.

Not always. Fair value, used in financial statements, is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (IFRS 13). Market value under IVS rests on similar premises, with a willing buyer and a willing seller acting knowledgeably and without compulsion. The price of a transaction may also reflect buyer-specific synergies and the negotiation between the parties, and can be above or below those values.