Business valuation is a complex field with multiple aspects in the determination of a business interest’s value. Whether you’re selling a business, buying a business interest, involved in court actions or estate planning, or filing gift taxes, a business valuator can assist you in achieving a realistic and fair valuation.
There are two types of business valuations – a full valuation and calculation of value.
A full valuation begins when a client and valuation analyst determine the valuation approach with an engagement letter outlining the extent of the valuation with a full report according to the professional standards of the business valuations. For a CPA certified in business valuation this would be the standards set by the American Institute of Certified Public Accountants (AICPA). Individual appraisal organizations have their own set of professional standards. A full AICPA valuation includes an estimate in value according to Statements on Standards for Valuation Services No. 1 with a valuation methodology appropriate for the circumstances, prescribed by the valuator. Then the valuator publishes a conclusion of value report. A full valuation report could exceed 45 pages with defensible proofs for the value determination on the business.
A calculation of value is limited in scope and nature and does not include any methodology considerations beyond those agreed to between the valuator and client. So a calculation of value could overlook important characteristics in valuing your business accurately, such as the optimal methodology, or specific value progenitors, i.e. a strategic sale. With a calculation of value neither is a detailed value report prepared that provides more depth on valuation numerics. A calculation of value is performed with only an agreement between the valuator and client on the methodology and procedures to performed on the business interest; a calculation of the business value according to the agreed upon procedures, and an opinion provided by the valuator to the client on the calculated value – such as an articulate oral report.
Reliant on the client purpose for a valuation and the cost savings, a calculation of value may be adequate in some instances for determining a businesses value. Calculations of value are less expensive than a comprehensive full valuation, but you should let the decision up to an experienced business valuator to advise on what valuation option is appropriate for your business. The thoroughness of a valuation requires that you provide the valuator with all relevant documents and financials to determine an appropriate value for your business. If financials are deficient or records inadequate you may need to choose a calculation of value because the appropriate records are not available for a full valuation report. With a full valuation report, there is little room for question on the thoroughness of value, and the report will be defensible in more circumstances. If the report is not for personal purposes, you would be well advised to choose a full valuation report.
Summary:
Business valuation is field where you are well advised to retain an expert to work with you in valuing your business interest. You understand the value of hiring an expert to file taxes for business entities; it’s the same with business valuation. If you need a valuation of your business, say for a transaction, for gifting purposes, or for estate planning, talk with your CPA or attorney to obtain a trusted referral to a valuation expert.