By: Stephen L. Ferraro, CPA/ABV/CFF, CVA, CBEC and MAFF
Business valuation analysts who hold the Certified Valuation Analyst (CVA) credential supported by the National Association of Certified Valuation Analysts (NACVA) or the Accredited in Business Valuation (ABV) credential supported by the American Institute of Certified Public Accountants (AICPA) are required to follow standards that clearly differentiate between two types of valuation engagements: Calculation of Value and Conclusion of Value. Similar to the various levels of attest services traditionally offered by CPAs in performing, including compilations, review or audits of financial statements; business valuation engagements are separated into these two distinct service categories. To provide maximum value for our clients we begin our engagements, where feasible, with a Calculation of Value for cost effectiveness and efficiency. The rationale behind our approach will become clear as you read on.
Calculation of Value
- The valuation methods to be used in determining value are discussed and agreed upon beforehand between the client and the valuation analyst.
- Reduced development and reporting requirements compared to a Conclusion of Value engagement.
- Ideal for planning purposes (e.g. strategic planning, transaction (purchase or sale) planning, buy/sell agreements or shareholder/partner litigation and divorce proceedings during the settlement stage).
- Valuation analyst does not opine of the value of the business or business interest, rather, the valuation analyst applies the valuation methodologies agreed upon with the client.
- Generally not defensible in litigation settings because the valuation analyst is not offering an opinion of value, rather, the analyst “calculates” a value based on methods agreed upon with the client.
- Typically costs less than a Conclusion of Value.
- Typically takes less time and is less invasive than a Conclusion of Value.
- Has been found to be useful in litigation situations in which a party to the lawsuit will obtain a Calculation of Value to aid in the settlement process; If a settlement is not reached, the engagement can easily rise to the level of a Conclusion of Value so that the valuation analyst can opine on a value and defend it in court, if necessary.
- Any work performed for the Calculation of Value can typically be leveraged to a Conclusion of Value.
Conclusion of Value
- All three valuation approaches (asset, income, and market approach) are required to be considered.
- Detailed development and reporting requirements must be adhered to by the valuation analyst, making the engagement more time consuming than a Calculation of Value
- This is the required type of valuation for estate and gift tax filings, 409a valuations and SBA loans. Also typically required for instances in which the valuation analyst will need to defend his or her findings and report (i.e. in litigation)
- The valuation analyst “opines” on the value of the business or business ownership interest
As you can tell from the discussion above, all “valuation” work is not created equal. For business owners, as well as their attorneys and other advisors, it is important to be aware of the varying levels of valuation service offered so that the appropriate type of report is obtained. You should discuss the purpose of the valuation with the valuation expert as the engagement is forming so that the level of service can be the most cost-effective, efficient and tailored to your specific needs.
The last thing that you want to do when having a valuation performed is pay too much to obtain a Conclusion of Value that is largely unnecessary and will only be used for planning purposes or, conversely, pay too little to obtain a Calculation of Value that will not hold up in litigation or under IRS scrutiny.