Christopher Didio, CFA, CFEThe value of a business is relevant in a wide variety of legal contexts, including divorces, shareholder disputes, mergers, bankruptcy and tax planning. Nevertheless, not every so-called “valuation” service is the same. It’s important to understand the different services valuators provide so you can make an informed choice.
Comparing Engagements
The American Institute of Certified Public Accountants (AICPA) recognizes the following two valuation engagements:
- Conclusions of value. Here, valuators consider all approaches and procedures they find appropriate for each circumstance. The valuation takes into account applicable valuation practices and standards, as well as any relevant legal precedents. The result may be presented as a single amount or a range of values.
- Calculations of value. This level of service is more “bare bones” than a full-blown valuation. For a calculation of value, the expert generally applies only approaches and procedures the client explicitly agrees to in advance. The result is presented as a calculated value, which may be a single amount or a range of values.
A calculation typically includes a disclaimer stating that the result could have been different if a full valuation had been performed. Beware: When presenting calculations in a litigation setting, this admission may raise a red flag to opposing counsel and discredit the expert’s conclusion in the eyes of the court.
The professional standards of other valuation organizations, such as the National Association of Certified Valuation Analysts (NACVA) and the American Society of Appraisers (ASA), provide similar guidance.
Selecting The Right Service Level
A full-blown valuation generally produces a comprehensive, reliable estimate. A calculation, however, can be a cost-effective option depending on the circumstances. For instance, a valuator might decline a valuation engagement because the requisite information isn’t available. In addition, a calculation could be appropriate for clients negotiating the sale of a business or settling a lawsuit. They also may be suitable for initial estate and tax planning.
On the other hand, a full-blown valuation is often required for IRS issues, such as estate and gift tax filings, as well as other valuation engagements, including valuations prepared for Small Business Administration programs. They’re also typically advisable when litigation is involved, as courts tend to find them more credible than calculations.
Look Before You Leap
When it comes to valuing a business, one size doesn’t necessarily fit all clients. Before hiring a valuation expert, it is important to discuss the intended uses, access to the company’s financial records, and time and resource constraints. This will help determine what’s appropriate for your situation.
