Business Valuation

When this practice applies

A valuation of a business or equity interest is mandated by one of the circumstances below. In each, the purpose of the report determines the applicable standard, authorized users, and the level of technical defensibility required.

• Fairness opinions in M&A transactions, tender offers, corporate restructurings, or related-party transactions, with peer review by counterparty and independent auditor.
• Purchase Price Allocation (PPA) under CPC 15 / IFRS 3, with valuation of the acquired business as input to the allocation of purchase price across identifiable assets and goodwill.
• Impairment of equity investments in subsidiaries, associates, or jointly controlled entities under CPC 01 / IAS 36.
• FIP and Venture Capital fund quotas: look-through valuation of portfolio companies, with stage-appropriate methodology (DCF/multiples for growth/maturity, adjusted last-round for early-stage) and treatment of waterfall, carry, and liquidation preferences on the quota.
• Earn-outs and contingent M&A payments: fair value of the contingent liability/asset, with simulation of probability of contractual trigger achievement and discounting at risk-appropriate rate to the payoff.
• Hybrid instruments with equity component: SAFE, convertible loan, convertible debentures: combined valuation of the debt instrument and the conversion optionality into equity of the underlying company.
• Corporate restructurings: spin-offs, mergers, incorporations, drop-downs, under articles 8, 45, and 226 of Brazilian Law 6.404.
• Related-party transactions with demonstration of fair value for fiscal and corporate purposes.
• Estate planning and family holdings, with valuation of equity interests for wealth and tax planning.
• Disputes, arbitration, and judicial reorganization, with reports prepared to sustain technical cross-examination.

Methodological approaches

Best international practice requires simultaneous application: and triangulation, of the three core approaches. In critical engagements, divergence among them is explicitly addressed in the report, with justification for the conclusion adopted.

Technical procedure

The procedure is the same regardless of report purpose. What varies is the depth applied at each stage, according to the materiality and complexity of the asset being valued.

1. Kickoff and mapping of critical assumptions

   Technical meeting with client, scope definition, identification of authorized users, data sources, information restrictions, and timeline. Engagement letter signed before kickoff.

2. Data collection and validation

   Audited financial statements, management projections, material contracts, sectoral regulation, listed comparables, and precedent transactions. Every source is archived in working papers.

3. Financial and sector diagnosis

   Historical analysis of margin, capex, working capital, leverage, and cash generation. Sector benchmarking and identification of the critical value drivers specific to the asset.

4. Construction of financial projections

   Modeling by revenue and cost line, with defensible assumptions and named sources. Explicit horizon calibrated to the business cycle, typically 5 to 10 years. Integral sensitivity to the most sensitive drivers.

5. Cost of capital calculation

   CAPM with unlevered and relevered sector beta, equity market risk premium, hard-currency risk-free rate adjusted for inflation differential, country risk premium, and size premium when applicable.

6. Modeling of the three approaches

   DCF with FCFF and/or FCFE depending on scope, terminal value via Gordon and reasonableness test via exit multiple, listed and precedent multiples with documented adjustments, asset approach when applicable.

7. Triangulation and sensitivity analysis

   Reconciliation of the three approaches, explicit justification for the adopted conclusion, sensitivity on critical drivers, and construction of a defensible range when the engagement demands it.

8. Working papers, formal report, and technical defense

   Full documentation archived for seven years, formal report following the engagement standard (CPC, IFRS, IVS, or Brazilian Corporate Law), and availability for defense in auditor, regulator, counterparty, or arbitrator review.

Areas of attention

The technical points below concentrate the highest volume of review and challenge against valuation reports in the Brazilian market. The CBG methodology anticipates each one in report construction.

• WACC in emerging markets

  Calibration of the country risk premium is the most frequent reason for technical challenge against a DCF. CBG applies a bottom-up CRP via sovereign CDS, with adjustments for sector exposure and size: not Damodaran's generic spread applied linearly.

• Terminal value and perpetuity

  In emerging-market DCFs, 60% to 80% of enterprise value typically resides in the terminal value. CBG defends the perpetuity via ROIC vs. WACC convergence, real growth assumption consistent with potential GDP, and a reasonableness test via exit multiple.

• Non-operating cash, working capital, and maintenance vs. expansion capex

  The distinction between operating and non-operating items, and the separation between maintenance capex (recurring, within the DCF) and expansion capex (excluded when there is no projected return base) are points where reports are frequently challenged.

• Growth assumptions and pipeline materialization

  Revenue projections anchored in uncontracted commercial pipeline, geographic expansion without corresponding capex, or rising margins without an explicit driver are red flags for any experienced auditor.

• Adjustments to comparable multiples

  Control adjustments (typically 20% to 35%), liquidity (DLOM via Finnerty, Chaffe, or Longstaff), and size (Duff & Phelps Risk Premium Report) must be justified quantitatively: not applied as generic heuristic.

• Methodological reconciliation among the three approaches

  Material divergences among DCF, multiples, and asset approach must be explicitly addressed in the report, with justification for the adopted conclusion. Silence on divergence is a defensibility deficiency.

Applicable standards

CBG works under simultaneous CPC and IFRS standards, with methodological reference to IVS (International Valuation Standards) and full compliance with the Brazilian Corporate Law.

Representative cases

Business valuation engagements conducted by the CBG team. Each case documents the context, the technical approach adopted, and the standards applied.

Lead team

Every engagement is led by a responsible partner or director, without team rotation or outsourcing. The person who builds the report is the person who defends it.