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What is a business valuation and when you would need one?

There are many reasons to engage us for valuation services and your reason is likely different than someone else’s reason. Some examples are mergers, acquisitions, estate or gift tax, marital dissolution, buy-sell agreements, and many more.

Outside of the formal definitions above, you can think of the following reasons you might want a business valuation in more digestible form:

  • To start discussions around a purchase or sale

  • To be used as a comparative measure of success and growth

  • To obtain bank financing

  • To increase or decrease the number of owners in the business

  • To meet IRS or other regulatory needs

Based on the reason, and specifically the intended use of the valuation, there will be varying levels of research, activities, and different methodologies used. At the highest level, you need to understand the difference between a valuation engagement and a calculation engagement. The final product of a valuation engagement is a conclusion of value, where the final product of a calculation engagement is a calculation of value.

Conclusion vs calculation is not clear to someone who hasn’t been through this before, so I’ll differentiate them in the following way: the conclusion of value allows the valuation analysis the freedom to determine value using any number of methodologies, industry and market knowledge, and comparative measures. The calculation of value is simply the activity of executing one agreed upon methodology. The result of either can be provided to the client as a detailed, summary, or oral report.

This probably seems like a lot and there are certainly many unique circumstances, regulations, and industry specifics to consider that I haven’t scratch the surface on. With so much that goes into a high quality valuation, how do you know you’ve engaged the right company or individual valuation analyst for your particular needs? As a CPA and member of the AICPA, I follow the AICPA Statement of Standards for Valuation Services No. 1. This standard must be followed by all members of the AICPA to keep the quality of the valuations at the highest levels. Within these standards it clearly articulates that the valuation analysis must have professional competence, objectivity, and independence.

Do you think you might need a business valuation, but would like to talk to someone to talk through your needs, please reach out directly and I can help you.

Ryan Lee