A Practical Guide for Understanding Business Valuations

9/6/2018 - By Rachel Fisch, CPA, ABV

The value of a business can be reported through two basic, but very important, formats: Valuation Engagements and Calculations of Value. When the value of a business needs to be substantiated or documented, for any reason, one of these services would be used to produce the following:

  • Valuation Engagements result in a Conclusion of Value 
  • Calculation Engagements result in a Calculated Value

Although both have their differences, they are each needed in a variety of circumstances.  

Valuation Engagements

The Valuation Engagement represents what most people would consider as an appraisal.  In a Valuation Engagement, the appraiser is expressing his or her independent opinion as to the value of the subject company.  It is up to the appraiser to consider all and apply one or more of the available valuation approaches and methodologies, and to examine the specific attributes of the subject company.  The economic environment, industry trends, as well as company specific issues are considered. 

Calculation Engagements

In contrast, the approaches and methodologies used in a Calculation of Value are agreed upon at the outset of the engagement.  Because the scope of the engagement is limited, the resulting Calculated Value does not represent the appraiser’s independent opinion.  

How Will I Know Which One to Use?

If the value of a business is needed for a matter involving litigation, then a full Valuation Engagement, which results in an Opinion of Value, is usually the best option.  An appraiser will be able to firmly stand in support of his or her opinion.  Other cases, such as those where the value will not be contested, a Calculation Engagement may be enough.

Large estates that contain a business may need the value documented.  If an estate is considerably less than the exemption ($5.6 million in 2018), many clients are choosing to have a Calculation of Value performed to provide some documentation of the subject company’s value. If an estate is near or over the exemption and the valuation of the subject company represents a significant part of the overall estate value, it is typically recommended that a full Valuation Engagement be performed.

Valuation Engagements and Calculation Engagements can also be helpful in the following situations, among others: 

  • Preparing prenuptial agreements
  • Dissolution of marriage 
  • Employee stock ownership plans (ESOPs)
  • Settling partnership disputes or establishing partnership agreements
  • Performing due diligence associated with merger and acquisition activity

If you have specific questions about business valuation services, including Valuation Engagements or Calculation Engagements, please do not hesitate to email me or contact one of our Business Valuation team members

About the Author | Rachel Fisch, CPA, ABV
Rachel is a manager in the Audit & Assurance Services Department of Saltmarsh, Cleaveland & Gund.  Rachel’s primary industries of expertise are construction, employee benefit plans, not-for-profit, manufacturing and technology. She has years of concentrated experience on managing, performing, and reviewing financial statement audits as well as performing small business valuations and providing litigation support.

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