Would you buy a new car if the only vehicle on the market was a BMW? How often would you go out to eat if the only menu item available was filet mignon? Thankfully, when it comes to what we drive and where we eat, we have options that fit our needs and our budgets. When it comes to valuing their business, many owners believe they only have one option, and often times they see this option as representing both more than they need and more than they want to spend. I have good news. In certain circumstances, you have options. The valuation standards allow for two types of engagements, one that results in a conclusion of value, and one that results in a calculation of value. A valuation expert can help you decide which of these would be best for your situation:
Valuation Engagement — Conclusion/Opinion of Value
- All three valuation approaches (asset, income, and market) must be considered.
- Requires a significant amount of detail in terms of documentation and reporting. Reports can be upward of 90 pages or more.
- A conclusion of value is the required type of report for any determination of value that is being submitted to the IRS. The most common of these circumstances relate to estate and gift tax filings.
- This is the only type of report in which a valuation analyst provides his/her opinion of value. As a result, a conclusion of value is generally required if the findings are used in a courtroom setting (divorce, shareholder disputes, other litigation not in the settlement process).
Calculation Engagement — Calculation of Value – No Opinion of Value
- Valuation approach, methods and extent of procedures used are determined based on discussion and agreement between the valuation analyst and the client.
- Less detail is required related to documentation and reporting.
- No opinion of value is presented. Rather, the report results in a calculated value based on the agreed upon approach, method, and procedures.
- The cost of a calculation report is generally much less than that of a report that results in a conclusion of value
Clearly, calculation engagements are not the answer in all circumstances. If you are involved with litigation or the IRS, or will be providing the report to a third party, you will want a valuation report, which will give you an opinion of value. However, calculation reports can be a highly valuable tool for business owners involved in:
- General business planning
- Estate planning – preliminary discussions
- Legal strategies or settlement evaluation
- Exit strategy planning
- Planning stages of buying/selling a business
- Creating or updating a buy-sell agreement
Contact Scott Hoyles, CPA, MBT, CGMA, Principal, to discuss the level of service that is appropriate for your valuation needs. He can be reached at 651-483-4521 or shoyles@otcpas.com.