Understanding the Difference Between a ‘Calculation of Value’ and ‘Conclusion of Value’
‘Calculation of Value’ Can be an Important Planning Tool
When an owner seeks a business valuation, the purpose for the valuation is an important determinant of the level of reporting that is required. Owners obtain business valuations for many reasons, including:
- Merger and acquisition plans
- Exit planning
- Succession planning
- Structuring buy/sell agreements among partners
- Owner’s divorce
- Estate planning
Understanding the reasons can help an owner and the prospective valuation professional decide between the types of valuation engagements. There are two types of valuation engagements: conclusion of value and calculation of value. A conclusion of value is more time-intensive and costly than a calculation of value, but the valuation data from both types are equally reliable and a calculation of value can be a valuable planning tool for many business owners.
Calculation of Value
A calculation of value results from a consultative process involving all stakeholders. It can be used to support a buy/sell agreement among partners, an owner’s financial planning, certain tax planning strategies (but not tax compliance), and certain business transactions.
The approaches and methods used for a calculation of value can be agreed upon among the business owner, stakeholders, and the valuation professional before the start of the engagement. Often, the business owner will defer to the valuation professional on the methods used. A combination of the market approach and the income approach generally yields a reliable range of value.
The results are presented as a range of values in a meeting with all stakeholders. While an owner can receive a fixed value estimate from a calculation of value, a range is more common.
Because of the lower cost, some business owners elect to obtain a calculation of value regularly – for instance, annually or every two years – to track the ROI of their efforts to improve their companies. Calculations of value are also used for internal strategic planning and planning for a business transaction.
Common reasons for obtaining a calculation of value include an owner being within five years of exiting their business or being ready to go to market.
Conclusion of Value
A conclusion of value engagement involves more procedures and meets stricter standards often required when dealing with the IRS, litigation matters, and mergers and acquisitions.
Because a conclusion of value engagement is more time-consuming (roughly five to six weeks), requires adherence to a broader range of reporting standards, and is generally more in-depth than a calculation report, it is a more expensive engagement for the business owner.
A conclusion of value engagement generally meets the standards required by the IRS, Tax Courts, Family Law Courts, the Department of Labor, and potential business buyers.
If you are considering a business valuation, contact an Adams Brown advisor for a discussion on whether a calculation of value or a conclusion of value engagement may be right for you.