Business Valuation vs. Business Calculation—Which Engagement is Right for You?

Business Valuation

A business valuation engagement is the highest level of service offered by a valuation analyst, which results in a conclusion of value for the business or ownership interest. To reach a conclusion of value, the valuation analyst considers each of the three valuation approaches (i.e., asset, income, and market approaches) and applies the method(s) thereunder deemed most appropriate given the circumstances. The valuation analyst also evaluates financial and nonfinancial information about the business, such as the nature, background, and history of the business; organizational structure and management team; products and services; economic and industry environment; business risks and strategy; and many other factors.

The results of a valuation engagement are usually communicated in a written detailed report. The report is structured to provide sufficient information to permit the intended users to understand the data, reasoning, and analyses underlying the conclusion of value.

While the thorough review of information completed under a valuation engagement provides a more supportable estimate of value, the extensive work required to collect this data and form the conclusion of value generally leads to a higher cost and longer timeframe to completion. The administrative burden on the business owner is also greater under a business valuation engagement, which will usually involve an in-depth management interview and likely a physical site visit, as well. As such, the client and the valuation analyst must weigh cost considerations, timing, and any data limitations against the need for a more defensible work product.

Business Calculation

A business calculation engagement is a lower level of service, which results in a calculation of value for the business or ownership interest. A calculation engagement differs from a valuation in terms of scope—specifically, the extent of procedures performed and the depth of review of information. In a calculation engagement, the valuation analyst and the client agree on the specific valuation approaches and methods to be used, and the analyst is limited to these procedures.

The calculation report itself is also shorter, with much of the background and supportive information that is included in a valuation report reduced or eliminated. Furthermore, if the user of the calculation report already has a deep understanding of the history and operations of the company, including a detailed writeup about the business will be less cost-beneficial than the estimated value itself.

With fewer procedures to perform and less supporting information to collect, analyze, and report on, a calculation engagement is generally a less expensive and time-consuming alternative. Yet, the same business valuation approaches and methods can still be utilized (if agreed to), and business calculation engagements also allow for the incorporation of reasonable assumptions.

A calculation engagement is typically suitable for use during preliminary settlement negotiations, management planning and strategy development, or when a full business valuation engagement is not practical due to time or budget constraints. However, since a calculation engagement does not include all of the procedures required for a valuation engagement, it may not be appropriate for use during trial where the results are scrutinized by a judge or compared to work done by an opposing expert. Additionally, a calculation report may not meet IRS adequate disclosure requirements.

Which is Right for You?

The decision between a valuation engagement or a calculation engagement is driven primarily by the specific purpose and use of the estimate of value, but additional considerations include the cost and timing of the analysis. In general, a valuation engagement is more a complex undertaking in that it requires more analysis, procedures, and documentation, which increases the overall cost of the engagement and length of time to complete. In contrast, a calculation engagement is usually a more straightforward undertaking, which also allows for the incorporation of reasonable assumptions, leading to a generally lower cost and quicker turnaround time.

If the estimate of value will not be included in IRS filings or the subject of litigation, a calculation engagement is generally adequate. However, if the estimate of value needs to stand up to IRS scrutiny or within a court of law, a business valuation engagement is more appropriate. Notwithstanding, if a client starts with a calculation engagement but later determines more assurance is needed, the calculation engagement can be elevated to a valuation engagement with the necessary additional procedures, analysis, and documentation. Also, if a client determines a valuation engagement suits their needs but the full detailed report is unnecessary, the results can be disclosed in a summary report to save costs.

Helping You Get There…

The right professionals can answer your questions and help you choose the level of service that’s right for your situation. Boulay has a team of dedicated professionals with specialized business valuation credentials and years of valuation experience who are ready to assist you. Contact us today, and our valuation team will schedule a consultation to discuss your needs.