Attorneys call on appraisal experts to provide various services, including both full valuations and calculations of value. While the two may sound the same, full valuations are preferable in certain circumstances.
Business valuation analysts must follow the professional standards of the appraisal organizations with which they are affiliated. For example, CPAs with the Accredited in Business Valuation (ABV) designation must follow the standards set forth by the American Institute of Certified Public Accountants (AICPA). Each appraisal organization has its own set of professional standards. Although these standards vary from each other somewhat, they generally concur on the amount of research and analysis required to prepare a full valuation.
According to the AICPA’s Statement on Standards for Valuation Services No. 1 (SSVS 1), for example, a full valuation is performed when the valuation analyst:
Calculations of Value
Under SSVS 1, a calculation of value is performed when three conditions are met:
The valuation analyst and client agree on the valuation approaches and methods the analyst will use and the extent of procedures he or she will perform in the process of calculating the value of the subject interest. These procedures typically will be more limited than those in a full valuation engagement.
The analyst calculates the value in accordance with the agreement.
The analyst expresses the result as a calculated value.
SSVS 1 explicitly indicates that the valuation analyst should qualify the calculated value by stating in the report that the calculation doesn’t include all of the procedures required for a full valuation. The analyst might also add a disclaimer that, if a full valuation had been performed, the results could have been different.
Sometimes, though, a full valuation isn’t necessary or possible, and a calculation of value will suffice — for example, when the analyst doesn’t have complete access to all of the relevant information. A calculation of value also could be appropriate for negotiating the purchase or sale of a business, for facilitating settlements or for mediation purposes. Your clients may further find a calculation of value useful for strategic planning, including tax and estate planning, and key-person insurance purposes.
Comprehensive Often Is Preferred
As previously discussed, a calculation engagement is limited in scope and won’t consider any valuation approaches and methods beyond those agreed upon with the client. In fact, many experts consider a calculation of value a “quick and dirty” estimate of a subject interest’s value. Unlike a full valuation, a calculation of value typically doesn’t involve a detailed report that can be time-consuming to produce. Instead, a calculation engagement might lead to an abbreviated letter report, numerical exhibits or oral presentations.
Although there’s no rule against testifying based on a calculation of value, courts usually prefer the more comprehensive full valuation. The IRS and Securities and Exchange Commission also typically prefer full valuations. For example, the IRS lays out guidelines for supporting documentation for tax purposes, which calculations of value don’t satisfy.
Selecting the Right Service
Calculations of value typically are less expensive than full valuations, and it may be tempting to cut corners on price. But the tab could end up much higher in the long run if the appraiser’s limited procedures and reporting format prove inadequate for your needs. To ensure you retain the appropriate service, provide your valuation expert with as much information as possible at the beginning of the process.
Our advice? Contact DGC today if you need a valuation expert. ■