Saturday, October 6, 2012: 4:30 PM
Business Valuation in the Czech Republic has got about 20 year long history which started with the
political changes from communistic to market oriented economy which lead to privatization of
former state companies and founding new businesses. In this way new markets for companies have
been created or re-opened (Prague Stock exchange). Therefore the need for business valuation
arouse too. It was a new economic area and the start was rather unrestrained. As a result many
business valuation specialists created their own approaches to business valuation and found various
solutions for specific problems in business valuation, such as specific risk premiums when estimating
the discount rate, relation between the purpose of valuation and the standard of value as well as the
discounts and premiums. This situation resulted in big variance in the estimated company values
among the valuers. The problem was emphasized due to legalization of squeeze-out at 2001 and
rising number of acquisitions where business valuation is legally demanded as a means of minority
shareholders protection. There are many lawsuits going on endlessly due to this variance in value
estimation. The International Valuation Standards are used by some professionals in the Czech
Republic or at least partially used. But in some areas we face the problem of market and legal
specifics as well as some practical problems like language barrier and terminology. Since the legal
system in the CR is very different from the U.S. one, some of the international standards are too
vague and not sufficient for our practice or use in law suits. The Czech business environment is rather
comparable to the German one so part of our research is also focused on valuation standards in
Germany (IDW). The objective of our research is to prepare national standards for business
valuation that would correspond with the Czech legal background as well as the specifics of the
market and it´s structure. If these standards were generally accepted it could help to raise the quality
of business valuation reports, lower the variance in resulting value estimates and it could be a useful
support for business valuers who testify for example at minority shareholder or marital dissolutions
law suites. This paper as a result of our research presents a proposal of Discounts and Premiums
national standard for business valuation with added reasoning where necessary. Due to illiquidity of
most of the Czech companies or stocks the estimation of illiquidity discount is one of the most
objected parts of valuation reports. Minority discount (control premium) is a similar case. The
standard proposal does not contain an exact way how to calculate these but it contains terminology,
recommendations in which cases the discounts and premiums should be incorporated in the
political changes from communistic to market oriented economy which lead to privatization of
former state companies and founding new businesses. In this way new markets for companies have
been created or re-opened (Prague Stock exchange). Therefore the need for business valuation
arouse too. It was a new economic area and the start was rather unrestrained. As a result many
business valuation specialists created their own approaches to business valuation and found various
solutions for specific problems in business valuation, such as specific risk premiums when estimating
the discount rate, relation between the purpose of valuation and the standard of value as well as the
discounts and premiums. This situation resulted in big variance in the estimated company values
among the valuers. The problem was emphasized due to legalization of squeeze-out at 2001 and
rising number of acquisitions where business valuation is legally demanded as a means of minority
shareholders protection. There are many lawsuits going on endlessly due to this variance in value
estimation. The International Valuation Standards are used by some professionals in the Czech
Republic or at least partially used. But in some areas we face the problem of market and legal
specifics as well as some practical problems like language barrier and terminology. Since the legal
system in the CR is very different from the U.S. one, some of the international standards are too
vague and not sufficient for our practice or use in law suits. The Czech business environment is rather
comparable to the German one so part of our research is also focused on valuation standards in
Germany (IDW). The objective of our research is to prepare national standards for business
valuation that would correspond with the Czech legal background as well as the specifics of the
market and it´s structure. If these standards were generally accepted it could help to raise the quality
of business valuation reports, lower the variance in resulting value estimates and it could be a useful
support for business valuers who testify for example at minority shareholder or marital dissolutions
law suites. This paper as a result of our research presents a proposal of Discounts and Premiums
national standard for business valuation with added reasoning where necessary. Due to illiquidity of
most of the Czech companies or stocks the estimation of illiquidity discount is one of the most
objected parts of valuation reports. Minority discount (control premium) is a similar case. The
standard proposal does not contain an exact way how to calculate these but it contains terminology,
recommendations in which cases the discounts and premiums should be incorporated in the
valuation as well as the factors that should be taken into account when estimating the value of a
discount or premium and what the valuation report should contain.
The paper was written as one of the outcomes of research project of the Faculty of Finance and
Accounting at the University of Economics, Prague, which was funded by institutional support
number VŠE IP100040.