EBVS — European Business Valuation Standards
Neeraj Agarwal
I Neeraj Agarwal, am a Fellow Member of ICAI, practicing under the banner of M/s AAN & Associates LLP, a firm based out of Banglore Mumbai.
I am also registered under Insolvency and Bankruptcy Board of India as a Registered Valuer for valuation of Security or Financial Assets (Passed in Feb 2020)
I am also holding Bachelor of Commerce (B. Com) degree from Calcutta University (Passed in 2011).
I have corporate working experience in Wipro. After working in Wipro for a short period I started my practice in late 2013 and have been in practice so far for the last 10 years. I have also completed a Certificate Course by ICAI on IND-AS in 2020. I have also cleared Social Auditor Exam conducted by NISM.
I have been inducted as a Special Invitee to the Sustainability Reporting Standard Board, ICAI for the FY 2023-24.
Recognizing that business (corporate) valuation is critical—especially when valuers need to value a company, goodwill, intangible assets, or going-concern enterprises—the European Group of Valuers’ Associations (TEGoVA) has developed European Business Valuation Standards (EBVS).
Purpose & Motivation
Many valuers who do real estate also engage in business valuation. Combining real estate and business expertise better serves clients whose operations and land are tightly intertwined. EBVS is intended to bring the same rigor and comparability to business valuation in Europe as EVS (European Valuation Standards) does for property. EBVS is explicitly designed to be consistent with EU law and accounting standards, and to meet pan‐European investor expectations.
When EBVS was introduced in 2020, it provided a common European approach rooted in EU regulation to bring consistency to business valuation reports across national boundaries.
Structure & Core Standards
- EBVS 1 – Market Value & Other Bases of Value
Defines what “value” means in business valuation: market value (sometimes called fair value), investment value, liquidation or break-up value, going concern, etc. It also deals with assumptions, special assumptions, and highest and best use applied in the business valuation context. - EBVS 2 – Valuation Process (Terms of Engagement to Execution)
Covers how the valuation is initiated: terms of engagement, scope, responsibility, conflict disclosures, assumption setting, review, and internal controls. - EBVS 3 – Approaches & Methods
Prescribes recognized valuation methods: income-based approaches (discounted cash flows, capitalisation of earnings), market multiples, asset-based methods, option-based models, real-option analyses, hybrid techniques, adjustments for lack of marketability, minority/control differentials. - EBVS 4 – Reporting & Review
Specifies how valuation results should be presented: report contents, disclosures, assumptions, sensitivity analysis, disclaimers, review standards, peer review, or external review.
Regulatory & Banking Valuation Standards (EBA / BRRD)
Valuation is particularly critical in banking, especially when banks fail (resolution) or for collateral valuations under supervision. The EU has adopted rules that impose binding valuation standards in some of these contexts.
EBA’s Technical Standards & Independent Valuer Rules
Under the Bank Recovery and Resolution Directive (BRRD), when banks are resolved, independent valuations must be performed to determine loss absorption and other resolution measures. The European Banking Authority (EBA) has published Regulatory Technical Standards (RTS) for valuations in resolution, including criteria for independent valuers.
Key points include:
- The valuer must rely only on information that could reasonably be known at the resolution decision date.
- Independence requirements: The valuer must be separate from both the bank and the resolution authority, have no conflict of interest, and must not have audited the bank recently.
- Methodological consistency, transparency, and reasoned justification for assumptions.
Valuation in Lending & Collateral
Banks, in valuing real estate or collateral for mortgage lending, often refer to valuation standards. While EVS is often considered a benchmark standard, regulators may require “prudently conservative” valuations, stricter assumptions, or additional margin stress testing. EVS 2025 strengthens alignment with prudently conservative criteria in mortgage valuation.
Statistical and Automated Valuation Standards: ESSVM
However, note that in longer introductory clauses (more than five words), a comma—as used here—is grammatically required and correctly placed. Just confirming that this is properly punctuated for large portfolios or real-time valuations. But those models need standards to ensure credibility, transparency, and appropriate use.
The European Standards for Statistical Valuation Methods (ESSVM) were developed by the European AVM Alliance to fill precisely that gap. The third edition became effective March 1, 2022.
Core Focus & Guidance
ESSVM provides:
- Principles and minimum requirements for statistical valuation methods (e.g., model validation, transparency, input quality, calibration).
- Guidance on method selection: when it is appropriate to use simpler vs. more advanced models, depending on asset heterogeneity, data granularity, market completeness, etc.
- Definitions and terminology: advanced statistical models, residual error, bias, model risk.
- Evaluation of accuracy, objectivity & reliability: statistical validation, benchmarking, error metrics.
Importantly, ESSVM emphasizes that statistical models are not a replacement for valuation judgment. A valuer must assess whether the model’s output is plausible, consistent with market evidence, and usable given context.
EVS 2025 (via EVS 6 / EVGN) incorporates guidance on using AVMs/statistical tools in compliance with EVS principles.
Challenges and Practical Issues
- National legal / tax divergences: Land use regulations, taxation, and lease systems differ across Europe; a “one-size-fits-all” approach can strain adaptation.
- Data availability & quality: Especially in less liquid or rural markets, comparable sales may be scarce, or transaction data unreliable.
- Model risk & overreliance on AVMs: Statistical models can produce inaccurate estimates when market conditions change; therefore, human oversight is essential.
- Cost vs rigor tradeoff: Applying full standard-level procedures can be costly; for smaller valuations, some simplifications might be tempting (but risk violating standards).
- Regulatory fragmentation: In some cross-border deals, multiple regulators or jurisdictions may impose different expectations, making alignment difficult.
- Standard lag vs market innovation: Standards evolve relatively slowly; sometimes the valuation practice or regulatory needs outpace the standard (e.g., new asset classes, digital real estate, tokenization).
- Enforcement & auditing: Standards are mostly voluntary (except where regulation mandates them). Ensuring compliance depends on professional bodies, peer review, and market discipline.
As we move into the mid-2020s, several trends are likely to shape European valuation standards:
- Greater emphasis on climate, ESG, and resilience: Valuation will more explicitly integrate climate risk, carbon regulation, physical risk (e.g., flooding), retrofit costs, and ESG credentials.
- Stronger integration with EU regulation and supervision: EVS 2025 already strengthens ties with banking oversight and mortgage regulation expectations.
- Increased use (and scrutiny) of AI and machine learning: As large datasets and AI models proliferate, standards will need to regulate provenance, explainability, bias, model validation, and hybrid methods.
- Expanding asset types under the standard umbrella: Beyond real estate and business valuation, efforts may grow for intangible assets, infrastructure, digital assets, and emerging asset classes.
- Enhanced cross-border credit and investment flows: As valuations converge, investors and lenders will be more willing to engage in cross-border exposure with confidence in valuation consistency.
- Certification and professionalism growth: More valuers may seek REV status or its equivalent; more peer review and audit mechanisms may be institutionalized.
- Standard updating cycles become more dynamic: To keep pace with regulation, technology, and markets, the cadence of updates (e.g., incorporating ESG, AI, uncertainty modeling) may become more frequent.
Conclusion
European valuation standards represent a major step towards harmonizing valuation practices across jurisdictions, raising professionalism, enhancing trust, and aligning valuations with regulatory expectations. The core suite of standards—EVS for real estate, EBVS for business, and EVS-PME for industrial assets—complemented by regulatory valuation rules and statistical model guidelines, provides a robust ecosystem.
- Always check which edition of the EBVS is applicable.
- Document all assumptions, adjustments, and rationale clearly—transparency is a key test of compliance.
- Do not use AVMs/statistical outputs blindly; assess, validate, adjust, and reconcile with market data.
- Be sensitive to regulatory overlays (especially in banking, mortgage, and resolution contexts).
- Pursue professional competence, peer review, continuing education, and, where possible, certification (REV).
- Monitor evolving trends (climate risk, ESG, AI) and integrate them into valuations proactively.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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