There are many reasons for business owners to seek a valuation for their business. In some instances, the entity may be required to obtain a valuation as part of a formal legal process, whereas in others, business owners may just need this information to better plan for the future.
The purpose of the valuation report, as well as the intended audience, are the primary drivers of the type of business valuation report you likely need. These factors drive not only the scope of the report but also the approach taken by the business valuation analysts you engage.
For a Certified Public Accountant, the field of business valuation is governed by professional standards set forth by the American Institute of Certified Public Accountants (AICPA) in the Statement on Standards for Valuation Services.
All CPAs must operate within this framework when undertaking any type of valuation engagement. Accrediting bodies for non-CPA valuation professionals exist and are well respected in the industry. However, the services outlined in this article are dedicated specifically to CPAs. When selecting an appraiser make sure they are certified for the service they are offering you and adhere to their professional standards.
In this overview, we will outline these different forms of valuation engagements, highlighting the key differences between each. We will also explore the factors that drive the type of business valuation product you might need.
Two Categories of Engagements to Estimate Value: Conclusion and Calculation
There are two types of engagements to estimate value with a CPA: a conclusion of value and a calculation of value. While the language used to refer to each report is relatively similar, the content and scope of each report differ significantly.
Conclusion of Value
In a conclusion of value engagement, the CPA provides an independent opinion on the value of the subject interest, typically all or a portion of a business.
Conclusion of Value reports are comprehensive, including, but not limited to, the analysis that the valuation analyst performed on the subject entity, economic and industry analysis, financial statement analysis, valuation approaches and methods used and not used, valuation adjustments, non-operating assets and liabilities, representations of the analyst, reconciliations if needed, qualifications of the analyst, appendices and exhibits all used together to arrive at their opinion on the value of the subject entity.
A conclusion of value is often used when the report is subject to third party scrutiny, such as by a judge, jury, or tax authorities. If your business needs a valuation report for any legal purpose, you will generally need a conclusion of value. Common scenarios include litigation, partner disputes, divorces, and tax compliance – essentially any situation where the value of the business is a question of legal importance.
Calculation of Value
In a calculation of value engagement, the valuation analyst and the client agree on valuation approaches and methods and even the extent of the procedures performed to create a more tailored estimate of value to the unique circumstances surrounding a business. While these reports are less comprehensive than a conclusion of value, they are more appropriate in many instances in which the reports will be used for internal management purposes, such as strategic planning or assessing specific opportunities and offers.
In a calculation of value engagement, there are opportunities for the valuation analyst and the client to collaborate on developing the assumptions that go into the valuation model.They offer a certain amount of flexibility that is not always possible in a conclusion of value engagement..
While Calculations of Value do not include all of the procedures and analysis required for a Conclusion of Value, they can provide a more cost-efficient alternative to a conclusion of value when the report will be used for internal business planning purposes.
Key Factors That Determine the Appropriate Valuation Report
As noted above, the primary factor that determines whether a business needs a conclusion of value or a calculation of value is the audience and intended purpose of the valuation report. If the report will be presented to a “trier of fact,” a conclusion of value is typically necessary. Alternatively, if the valuation is for internal purposes, a calculation of value may be more appropriate.
The costs associated with obtaining these reports can also be a factor. The detailed reports required for a conclusion of value involve more research and analysis, and as a result, are more expensive. If an entrepreneur is just curious about the value of their business, they may wish to engage a valuation firm to perform a simpler calculation of value at a fraction of the cost of a full conclusion of value.
The most significant factor that may determine the appropriate type of valuation report is whether the report will be subject to scrutiny by an outside party, such as a taxing authority or a trier of fact. If it is, you will need a conclusion of value. If not, a calculation of value may be a better choice.
Regardless of the situation, it is incumbent on business valuation firms to collaborate with you to understand the type of report you need. This is a complex field and it is important to find a reputable firm with a demonstrated track record.
HoganTaylor: A Nationally Renowned Business Valuation Firm
In many instances, a business appraisal coincides with a watershed moment, whether that is the sale of your business or some form of litigation. This can be a stressful process and it’s vital businesses partner with an established firm they can trust.
At HoganTaylor, our business valuation team provides a wide range of valuation services to companies all over the country. Our accredited business valuation analysts work closely with clients in a wide range of industries, providing a full range of business valuation services.
We take a bespoke approach that is tailored to the unique needs of every engagement, whether that is producing a conclusion of value and serving as an expert witness or helping entrepreneurs better plan for the future.
To learn more about HoganTaylor’s business valuation services, talk to an expert today.
How HoganTaylor Can Help
If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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