Business owners, attorneys, brokers and advisors frequently have the need for a business valuation. Often times their needs require something less than a lengthy, comprehensive business valuation report, which can be relatively costly. A calculation of value may be the perfect option for someone needing a preliminary or “back of the napkin” business valuation.
A calculation of value is an estimate of the value of a business arrived at by applying valuation procedures agreed upon with the client and using professional judgment as to the value or range of values based on those procedures.
A calculation of value can be performed as part of a calculation engagement, which is defined by the American Institute of Certified Public Accountants (AICPA) as:
“A valuation analyst performs a calculation engagement when (1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest and (2) the valuation analyst calculates the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value either as a single amount or a range. A calculation engagement does not include all of the procedures required for a valuation engagement and if a valuation engagement had been performed, the results might have been different.”
A noteworthy item from the above definition is that a calculation engagement does not include all of the procedures and requirements of a full, comprehensive valuation, which is technically referred to as a valuation engagement by the AICPA. In the event a full, comprehensive valuation was performed, that value may be different from the value reached in a calculation of value.
The scope of a calculation engagement is less than what is required in preparing a full, comprehensive business valuation. Examples of scope limitations for a calculation of value include, but are not limited to, the following:
The AICPA standards do not prohibit or endorse the use of calculations of value under any specific purpose of valuation. However, other regulatory bodies such as the Internal Revenue Service (IRS), Tax Courts, Family Law Courts, the Department of Labor, etc., have requirements or standards which may prohibit the use of calculations of value. Common purposes for using a calculation of value rather than a full, comprehensive valuation are as follows:
About the Author
Jason LeRoy specializes in preparing business valuations for litigation and non-litigation purposes, and providing expert witness testimony and marital dissolution consulting services, as well as fraud and forensic accounting services. He can be contacted directly at firstname.lastname@example.org or 248.244.3177.
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