June 9, 2017 | Valuations
Most business valuators offer two types of appraisal services. Formal valuations are the most common, and require significant time and in-depth analyses. Sometimes, however, a less formal calculation of value will do, as long as it’s not expected to stand up to outside scrutiny.
Formal valuations generate an official conclusion in accordance with the valuator’s professional standards. In contrast, calculations provide simply an indication of the business’ value, based on assumptions and procedures to which the client and the appraiser have agreed.
In addition, part of a formal valuation is a detailed appraisal report. This is one of the most time-consuming and costly steps in the process, and therefore a calculation engagement may call for a much more abbreviated report.
Calculations may be enough when a written report isn’t necessary. An example of this is for a business owner who is curious about the value for strategic planning purposes. Calculations also may facilitate settlement talks in shareholder disputes or divorces.
Disclosure Is Key
Sometimes, as in the case of a noncontrolling business interest or a nonmonied spouse in a settlement discussion, some clients have limited access to the subject company’s financial data, personnel or facilities. A valuator can perform a calculation without complete access to the information, with things like tax returns, omitting management interviews and site visits. Keep in mind, however, that all omissions and limitations must be fully disclosed in the calculation letter.
Know the Limits
When an appraiser is engaged to perform a calculation, communication is critical. The engagement letter is a legal contract between the client and appraiser and establishes expectations up front. Additionally, valuators specifically list scope limitations in their engagement letters, spreadsheets and written reports.
In considering whether a calculation engagement is appropriate, the most important factor is the ultimate use of the appraisal. Business owners must understand the limitations of value calculations. There are times when a formal valuation is required, such as gift and estate tax filings or disagreements that are bound for the courtroom.
Filler & Associates can help determine if a calculation could be a better alternative when considering a business appraisal. It could provide the needed results with less expense