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CVA: Financial Consulting

CVA · Work through your exam, one topic at a time.

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Financial Consulting

The Financial Consulting domain tests advisory work rather than formal appraisal: mergers and acquisitions, due diligence, buy-sell agreements, fairness and solvency opinions, and value enhancement. The key distinction is that consulting conclusions may use buyer-specific standards, while a fair market value appraisal may not.

Advisory engagements

  • Define the scope, standard of value, and intended use in the engagement letter. Investment value and synergistic value are appropriate for a specific buyer; fair market value is not buyer-specific.
  • A fairness opinion addresses whether consideration is fair from a financial point of view. A solvency opinion addresses whether the company can pay its debts as they come due after the transaction, using balance-sheet and cash-flow tests.
  • Buy-sell agreements should specify the pricing mechanism (formula, appraisal, or agreed value), the valuation date, and funding, often through life insurance; review them periodically.

Due diligence and M&A

  • Quality of earnings analysis normalizes EBITDA for nonrecurring items, above-market owner compensation, and related-party rents.
  • Identify debt-like items (earnouts, deferred maintenance capex, unfunded pensions) and set a working capital peg.
  • Synergy value belongs in the buyer's model: capitalize run-rate cost synergies, then subtract integration costs and dis-synergies.

Value enhancement

  • The main drivers are revenue growth, profit margin, capital efficiency, cost of capital, and the competitive advantage period over which growth persists.

Worked example

Standalone equity value is $100 million. The present value of run-rate synergies is $24 million, integration costs are $6 million, and dis-synergies are $2 million. The maximum justifiable purchase price = $100 + $24 − $6 − $2 = $116 million. If the buyer pays $110 million, expected value creation is $6 million. The analysis should show the purchase-price allocation and stress-test synergy assumptions.

Traps

  • Presenting a fairness opinion as a solvency opinion.
  • Capitalizing one-time synergies as a perpetuity.
  • Ignoring integration costs, dis-synergies, and the working capital peg.
  • Using buyer-specific assumptions in a fair market value appraisal without disclosure.
  • Failing to distinguish control and marketability in the conclusion.