Business valuation terminology can be confusing and full of acronyms that, when combined, feel like alphabet soup. For someone needing a business valuation – whether for a dispute (shareholder or divorce settlement) or for estate settlement or tax purposes, understanding what you need and what you are getting are both essential.
Buyer Beware: Calculation Assignment or Calculation Report
While I have been preparing detailed business valuations for years, I am seeing a growth in a lower cost alternative referred to as a ‘calculation assignment’ or a ‘calculation report’ that reminds me of the adage: you get what you pay for. The appeal of the lower price is understandable, but the deliverable is not. I encourage you to read on, to learn the reasoning for why these calculated reports are not useful and typically cause more angst as they set unrealistic expectations, reduce trust, further disputes, and increase overall costs.
Taking a Step Back: Step 1 Why do you need a business valuation?
If you are talking to professionals about the need for a business valuation, take a step back and think about why you need a valuation. Is the trigger for any of he following reasons:
- Divorce settlement?
- Shareholder dispute?
- Taxes: settling an estate or gifting shares in the business?
- Selling the business?
If you answered yes to any of these four categories for needing a business valuation, you need a real, thorough, detailed valuation that stands up to scrutiny. The valuation needs to present how the valuation was determined and provide detailed support to answer why the valuation was determined to be as written. If you are simply curious and asking “I wonder what my business may be worth?” and are looking for a rough idea then read on.
Step 2: What do you need in terms of a valuation report?
This is where most business owners hesitate (and rightfully so). As a business owner you run and lead your business, but you are not a business valuation professional. It is completely reasonable for you to respond – “How the heck should I know?” I have never needed a valuation before!
Important Considerations for how the Business Valuation Report will be used:
- Does the valuation need to stand up to scrutiny? In other words, is it likely there could be a disagreement about the determined value? In a divorce, it is highly likely that each party will have its own viewpoint on the business valuation. In the case of a shareholder dispute or a sale, the same is true. One party will benefit from a lower valuation while another will benefit from a higher valuation. The same logic applies to a valuation needed to settle a tax matter – the individual paying the taxes seeks a lower business valuation while the IRS will benefit from a higher valuation of the business.
- Do the interested parties need to be able to follow how the valuation was determined? In other words, is supporting detail important to provide explanation, rationale, and calculations to support the determined valuation?
If you answered yes to one or both of the above questions, you need to be speaking with an accredited business valuation professional who has the expertise and credentials to prepare and present a business valuation that results in an opinion of value that is supported with how and why the valuation was determined.
The reports meet the standards of the USPAP, the highest standards applied for business valuations. Ask any valuation professional about the deliverable and assess their credentials by looking for both or at a minimum one of the following credentials:
- Accredited Senior Appraiser (ASA) – only professional designation to comply with USPAP
- Certified Business Appraiser (CBA) – designation from the Institute of Business Appraisers (~200 across the country in total)
Back to Calculation Assignments and Calculation Reports
These reports or assignments are not business appraisals. They were not designed to serve as an alternative to a full business appraisal. They were intended to provide a rough idea of the value of a business and do not include any supporting detail that would be adequate to stand up to the scrutiny of settling a divorce or shareholder dispute. The IRS is unlikely to rely on any such report to adequately explain the value of a business.
The report or calculation assignment is supposed to include a disclaimer that the report is not an opinion of value but, unfortunately, I have had multiple clients come to me after learning the hard way that what they paid for was inadequate to address their initial need for a valuation and they lost valuable time and incurred additional legal expenses only to realize they needed my professional services to develop a business appraisal that would stand up to scrutiny and be an objective and thorough analysis presenting how and why the valuation was determined.
Our industry is governed by the USPAP standards. Many CPAs and accountants seek to help their clients, especially smaller business owners by offering to prepare a calculation assignment to give them a rough idea of the value of their business. With good intent, the rough idea is inadequate to support gifting shares, settling a divorce, or settling a shareholder dispute.
If you need an opinion of value for a business, do not invest in a calculation assignment or calculation report. These reports do not meet the standards of support and detail that a business valuation must include. To learn more about the three types of valuation reports that Merrimack Business Appraisers prepares, click here. Read FAQs on our website for additional information .
Understand why you need a business appraisal and be confident in asking specifically, what does the end deliverable include and what are the credentials of the professional who is preparing the business valuation? Answers to these questions can save you time and money.
When Values Matter.