Redpath Insights

valuationvscalculation

There are Many Business Valuation Approaches - Which One is Best For Your Business?

by Emmett Mulcahy, CPA, CVA

When it comes to valuing a business, every situation is unique. There are several reasons one might need an appraisal of a business. Dependent upon the reason for the valuation and the client’s needs, a valuation expert may consider either a valuation engagement or a calculation engagement to determine the value of a business.

The same way an accounting firm may perform an audit, review, or compilation depending on the level of assurance needed by the client, a valuation expert may consider a calculation or valuation engagement depending on the client’s needs.

Both of these engagements are governed by professional standards. However, there are some differences between the two.

A valuation engagement (conclusion of value)

This typically requires more research, investigation and analysis than a calculation engagement and results in the valuation expert’s opinion of value. To arrive at a conclusion of value, the valuation expert is required to consider all three valuation methodologies (asset-based, income-based, and market-based), as well as perform a detailed fundamental analysis of the company, the historical financial statements, the industry in which they operate, and more.

This makes a valuation engagement more time-consuming and costly than a calculation engagement, but it is necessary when presenting a defensible opinion of value.

A calculation engagement (calculation of value)

This results in a calculated value and not expert’s opinion of value. This type of engagement allows for reasonable assumptions to be made and requires less development and reporting requirements which allows for a less detailed fundamental analysis. Additionally, in performing a calculation engagement, the valuation expert and the client would agree on the valuation approaches and methods utilized in the report, as well as the extent of procedures the expert would perform in the process of calculating the value of the subject interest.

Typically, a calculation of value will cost less than a conclusion of value. This type of engagement may be appropriate for planning purposes, preliminary negotiations, merger and acquisition activity, or when a valuation engagement is impractical due to budgetary or time constraints.

When looking to determine the value of your business it’s important to understand the levels of service available and match those with your needs as a client. To further compare the two types of engagement, see the table below:

Business Valuation

Emmett Mulcahy, CPA, CVA

Emmett Mulcahy, CPA, CVA

Emmett Mulcahy is a director and leads the valuation service area at Redpath and Company. He assists clients with business valuations for ESOP, estate and gift tax, shareholder buyout, buy/sell agreement and transaction consulting purposes. Emmett works with a variety of clients in industries such as construction, architects and engineers, family limited partnerships, manufacturing, and real estate. He has provided public accounting services at Redpath and Company since 2008.