What is the difference between a “valuation engagement” and a “calculation engagement”?
Valuation engagement – where the CPA estimates the value of a subject interest and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances. The CPA expresses the results of the valuation as a conclusion of value; either as a range or a single amount. This is the highest level of valuation services available. The CPA is expressing an independent conclusion of value, applying all applicable approaches and methods that are deemed necessary.
Calculation engagement – where the CPA agrees with the client as to the specific valuation approaches and methods of valuation that the CPA will use and the extent of procedures that the CPA will perform in the process of calculating the value of a subject interest. These procedures are more limited in scope than in a valuation engagement and may or may not represent the actual value of the subject interest. In essence, a calculation engagement is a projection of value using only a limited number of specifically defined valuation approaches and methods.
What are some different valuation approaches and some methods of each approach?
The best valuations utilize as many properly applied approaches and methods as possible. They should mirror the income, asset mix and market perception of the business enterprise involved.
Income approach – uses income / cash flow streams as an indication of current value.
- Discounted future economic income method (“DCF Model”)
- Capitalized future economic income method
Market approach – uses comparative actual transactional data within the marketplace as an indication of current value.
- Guideline publically traded company method
- Guideline merged & acquired company method
Asset approach– uses replacement cost, fair market value, etc. of underlying assets as an indication of value.
- Asset accumulation method
- Capitalized excess earnings method
So can’t you just look up a number in a book or give me a “rule of thumb” as to what my business is worth?
No, not ethically and it is probably not in your best interests for anyone to do so. Today’s businesses are more complex and there is more relative information available to help determine what a business interest’s “fair market value” is. Every business and its ownership structure are unique.
Potential buyers / lenders / end users want to know if a valuation report is an expert’s independent conclusion of value, a calculation of a possible value utilizing using defined methods and approaches, or simply a guess by a party that or may not be qualified or have performed the work necessary to produce a quality, realistic valuation. Sellers / borrowers / end users want to maximize their value and minimize their risk.
OK, I get it. For everyone’s benefit, valuation services are no longer just a “seat of pants” affair. Sounds like a lot of work to get the benefits of a proper valuation. What does it cost to have a valuation done?
The cost of valuation services can vary greatly based on what is being valued. Typically, Stevenson Valuation Group reviews a core set of documents as to a prospective valuation engagement and provides an estimated fee range.
Whether a business’s conclusion of value is $1,000,000 or $100,000,000, many of the same core questions need ask and the same valuation-related procedures need followed. Many factors can affect the ultimate cost of valuation services to a Company including how the valuation will be used, the quality of Company historical financial records, political and economic conditions, the Company’s organizational and tax structure, the complexity and dispersion of ownership and equity rights, the sophistication and availability of Company financial and management personnel, the availability and quality of Company’s projected financial information, geographic markets served, age and physical location(s) of facilities and where the Company and their industry is within their respective life-cycles.
Valuation engagement– it is seldom, even as to a relatively small business, that an initial valuation engagement costs less than $5,000 to $10,000 to produce and arrive at a conclusion of value. The vast majority of valuation engagements that Stevenson Valuation Group typically performs cost less than $10,000. That said, the cost of complicated valuation engagements can well exceed that cost amount.
Calculation engagement– Less in scope and not a conclusion of actual value, calculation engagements are less costly to produce. They generally cost less than a valuation engagement. How much so depends primarily on the quantity and type of valuation approaches and methods that the client requests to have included in the calculation of value. The typical fee range of a calculation engagement is currently around $4,000 to $6,000, depending on the circumstances.
If the business enterprise has previously been recently valued, subsequent ongoing periodic valuations are generally less in cost.
Generally, if real estate or appreciated tangible property is included within a business, a separate independent appraisal of those assets will often be required. The results of those appraisals are then incorporated in the overall business enterprise valuation.