FAQs about Business Valuation Services

1. So what are some of the areas in which people need valuation services?
2. So when I request a CPA to prepare an estimate of value, what is involved?
3. So what is SSVS?
4. How do valuation-related services compare to historical financial statements?
5. What is the difference between a "valuation engagement" and a "calculation engagement"?
6. So what is an ABV?
7. 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?
8. From a valuation perspective, why is every business unique?
9. What are some different valuation approaches and some methods of each approach?
10. Isn't the "value" of something, just its "value"?
11. Can viewpoint and timing affect "value"?
12. What does it cost to have a valuation done?
13. I am thinking about selling my business. Why is a valuation one of the first things I should consider?
14. I am thinking about buying a business. Why is a valuation, or at least some advanced due diligence, one of the first things I should consider?
15. What is the "finished product" when a valuation engagement or calculation engagement is performed?
16. The following matrix is a comparative summary of information (and an indication of the corresponding work required) that is most often included in the three types of written reports:
17. Are just CPAs changing how valuation services are being delivered and the requirements that must be included?

1. So what are some of the areas in which people need valuation services?

   EEPB is often asked to assist in matters concerning the valuation of a business enterprise or the ownership interest(s) associated with a business enterprise. There are a wide range of uses for valuations including mergers, acquisitions, dispositions, estate & gift planning, buy sell agreements, divorce and litigation matters. Valuation related issues in litigation matters can include breach of contract disputes, business interruption cases, minority shareholder disputes, wrongful termination, etc, etc. – virtually any damages related issue.

2. So when I request a CPA to prepare an estimate of value, what is involved?

   Whether valuation related services are for an existing client or for new clients, CPAs who are members of the American Institute of Certified Public Accountants ("AICPA") are required to follow various professional standards in matters requiring an estimate of value. The primarily governing standard is the Statement on Standards for Valuation Services No. 1 ("SSVS").
   
   

3. So what is SSVS?

   SSVS was issued by the AICPA in June of 2007 and became effective as to all valuation engagements accepted on or after January 1, 2008. SSVS does a number of things, including:
   
   
   • Standardizes and mandates specific procedures that a CPA must follow in preparing and issuing an estimate of value
   • Standardizes and mandates specific components that a CPA's valuation opinion report must include and
   • Establishes specific levels of valuation services so that an end user can recognize the type of valuation services being provided and apply an appropriate amount of reliance on them.
     
     

4. How do valuation-related services compare to historical financial statements?

   For years, the public and other end users of historical financial statements have relied on three primary levels of CPA's accountant opinion reports, each describing various levels of work performed by and types of assurance being given by the CPA. These indicators help determine the amount of reliance an end user may place on the historical financial statements being presented.
   
   "Audited report" – highest level of services performed by CPA / highest reliance by end user,
   "Reviewed report" – medium level of services performed by CPA / medium reliance by end user and
   "Compiled report" – least amount of services performed CPA / least reliance by end user.
   
   This standardization of professional services provides for flexibility by the reporting business enterprise in selecting the most cost-efficient historical financial statement opinion type, while providing the users of such historical financial statements with a consistent understanding of the level of scrutiny that such financial information has undergone, and the amount of reliance that they can put on such information.
   
   For valuation related engagements, SSVS performs a similar function by establishing and defining the requirements of two primary types of accepted valuation related services – a "valuation engagement" and a "calculation engagement".
   
   

5. 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.
   
   

6. So what is an ABV?

   ABV stands for "Accredited in Business Valuation". Much like the CPA designation for certified public accountants, ABV is an additional accreditation granted by the AICPA to CPAs who also meet stiff requirements with regard to providing valuation services. Once the CPA passes a separate valuation examination and then meets separate valuation experience requirements, ABV certification is awarded. As an ABV, CPAs are also required to meet minimum, annual continuing professional education requirements, specifically as to on-going valuation training, in order to stay abreast of ever changing valuation theories and their proper application.
   
   

7. 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.
   
   

8. From a valuation perspective, why is every business unique?

   So your "neighbors" just sold their "ownership" in a "service" business for "five times" "earnings". While that description is a nice ten second summary, is that a universal benchmark and a simple way to establish a "fair price" for your own business? Not hardly.
   
   The following are just a few examples of the many things that should be considered, in order to make an "apples-to-apples" valuation comparison:
   
   Does either business have?

   An over reliance on one or more key executives?
   Competent, ongoing management team in place
   Excessive geographic or industry concentrations of customers, suppliers, etc.
   Non-income producing assets within the business?
   Appreciated or depreciated assets as compared to their book value?
   Facility and equipment capacity for growth without significant additional capital investment?
   What is the comparative average age of the workforce-in-place?
   What is the cost in time and dollars to grow each business' respective workforce?
   GAAP basis financial statements?
   Audited financial statements?
   Operations in a "high risk" environment due to location, product type, technology, potential legislation, litigation, etc.?
   Comparable compensation, retirement, health insurance policies?
   Current technology in place and a work force trained to benefit from it?
   Unionized labor issues?
   ESOPs and or underfunded retirement plans?
   Are employment tax filings current and paid?
   State income tax liabilities current for all states where the business has nexus?
   Statute of limitations issues for possible irregularities with prior federal income tax filings?
   Hazard waste / environmental factors?
   International transactions, currency issues, etc.?
   Debt financing and liquidity issues without the ongoing debt guarantees, loans or equity support of owners?

   Pending litigation from customers, employees, vendors, environmental issues, etc.?

   Any adjustments needed to "normalize" earnings to account for:
   Non-recurring revenue or expense items that might be extraordinary?
   LIFO or obsolete inventory adjustments?
   Non-business expenses inside the business?
   Are key-personnel or the labor force at large under or over compensated?
   How will inflation affect the future net cash flows available from the business?
   Based on the trailing five-year history, what is the stability of the revenue base being generated from the top ten customers?

   Exactly what was being sold?:

   Was a voting or nonvoting ownership interest being sold?
   Was a control or a noncontrolling interest being sold?
   Was it an "asset" or a "stock purchase"?
   Form of business of the seller - a C Corp., an S Corp., a partnership, an LLC, etc?
   Are patents, trademarks, exclusive contracts, licenses, permits, employment agreements or other intangible assets involved? What are their remaining useful lives?
   Was the purchaser a "strategic buyer" already in the business that was willing to pay a premium?
   Were key employees "locked up" under covenants-not-to-compete, equity vesting programs, "golden parachutes" or other similar arrangements?
   Did the seller get to retain any "business" assets?

   Were there any discounts or premiums applied?:
   

   Any lack of marketability discounts?
   Was a premium paid because the buyer acquired control through the purchase?
   Was a discount applied because buyer held a minority position after the purchase?
   Did the buyer pay a "synergistic" premium to obtain market share, expand an existing business in which future costs could be minimized or some other reason?

   Just a few possible "deal" variables:
   

   Was the valuation multiple that was applied to determine the sales price computed on gross revenues, EBIT, EBITDA, free cash flow or something else?
   Based on the risk involved for the specific business, what discount or capitalization rate was utilized in determining the valuation?
   What future growth rate was utilized?
   Was an "earn-out" based on future earnings part of the sales price? Terms?
   What are the post-sale employment constraints / compensation amounts to be paid to the seller?
   Was there a covenant not to compete? Separate consideration, how long and how broad?
   Terms of any seller financing? Interest rates, security, maturity dates, voting privileges, etc.
   Was it an all cash deal?
   How much cash down payment as a percentage of the deal?
   How much "holdback" was set aside for potential future liabilities of the buyer?
   How much "net working capital" within the business did the seller have to "bring to the closing table"?
   How credit worthy was the buyer and any related debt guarantors?

    

   It is fairly easy to see how just a few, of any of the above factors, could have a major impact on the difference in value that might exist between Company A and Company B. Even if they are in the same industry and in the same city. Even if they had the same gross revenues or cash flow from operations, for any point in time.
   
   

9. 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
     
     

10. Isn't the "value" of something, just its "value"?

    The word "value" means different things to different people. Business commerce, the courts and the IRS have established many definitions or standards of "value", for many different purposes. Different standards of value include.
    
    Fair market value - probably the most common, classically defined as – "the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts". Also know as cash value or market value.
    
    Fair value – commonly used in situation such as dissenting shareholders, minority oppression cases, dissolution actions, can be based on accounting literature, legal standards, state law and many other factors.
    
    Investment value –the specific value of an investment to a particular investor or class of investors, based on individual investment requirements, distinguished from market value, which is impersonal and detached. Also known as the synergistic value or the value in the marketplace.
    
    Intrinsic or fundamental value – an analytic judgment of value based on perceived characteristic inherit in the investment. This is usually derived through a fundamental analysis to detect differences in the value of security between the market and what it "ought to have" based on the fundamental analysis
    
    Many of the above standards of value can be impacted by statutory and case law, which may be applied differently to the specific state(s) in which the business interest is held or operates.
    
    

11. Can viewpoint and timing affect "value"

    There are several fundamental premises of values that could affect the value of a business, depending on from what viewpoint a business is being valued. These premises of value include:
    
    
    • Value as a going concern – as mass assemblage of income producing asset and as a going-concern business enterprise
    • Value as an assemblage of assets – value in place as an assemblage of assets, but not in the current use in the production of income and not as a going–concern business enterprise.
    • Value as an orderly disposition – value in exchange, on a piecemeal basis, as part of an orderly disposition. This contemplates that all of the assets of the business enterprise will be sold individually and that they will enjoy normal exposure to their appropriate secondary market.
    • Value as a forced liquidation - value in exchange, on a piecemeal basis, as part of a forced liquidation. This contemplates that all of the assets of the business enterprise will be sold individually and that they will experience less than normal exposure to their appropriate secondary market.
    
    Part of the CPA's role in the valuation process, is to insure that the ending valuation report and the standards, approaches, methods and premises of value used, match the specific purpose(s) for which the valuation will be used.
    
    

12. 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, EEPB 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 $10,000 to $15,000 to produce and arrive at a conclusion of value. The vast majority of valuation engagements that EEPB typically performs cost less than $25,000. 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 $8,000, 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.
    
    

13. I am thinking about selling my business. Why is a valuation one of the first things I should consider?

    To help maximize your sales price and minimize your costs of sale and risk of loss.
    
    A valuation can help identify areas relative to your competitors and the marketplace, where your business can be improved in advance, before discovery of such weaknesses in the due diligence process.
    
    Beginning a periodic valuation process three years from your targeted sale date is not unrealistic. The Company's historical financial statements can then be legitimately "groomed" to reflect the proper, maximum net worth of your business. A periodic valuation can serve as part of a road map to assist in enhancing an on-going management team and establishing financial results that are superior to those of your competition.
    
    If you do not identify and correct weaknesses in advance, chances are that a potential buyer will discover such weaknesses in their due diligence and penalize the "deal" price accordingly.
    
    The expectations of you and other selling owners can also be realistically set. The sale of a business can be a time intensive and costly process. Such efforts are not always successful and can have varying impact on relationships with lenders, vendors, customers and employees among others. Advanced knowledge of the potential costs and benefits of a potential sale decision can be invaluable in deciding whether and when to take such a plunge.
    
    A valuation can be a tool to help your business ultimately successfully sell at a premium.
    
    

14. I am thinking about buying a business. Why is a valuation, or at least some advanced due diligence, one of the first things I should consider?

    To help minimize risk and establish a realistic sales price that will bring the transaction to fruition. The time to indentify whether a "deal" is doable or not, is before significant fees and time has been incurred and expectations have been established.
    
    In many respects, a valuation is an advanced form of due diligence that results in a conclusion of value. A potential seller may or may not disclose enough information at any particular stage of negotiations to generate an independent valuation. Even if a conclusion of value cannot ultimately be formed, the valuation process should, for the benefit of a potential buyer, help to identify strengths and weaknesses in a potential target.
    
    
15. What is the "finished product" when a valuation engagement or calculation engagement is performed? An ABV valuation analyst will generally produce a written report in either a Valuation or Calculation Engagement. Valuation Engagements can have either a Detailed or a Summary Report.
    
    A Detailed Report for a Valuation Engagement can often approximate one hundred pages or more in length, depending on the subject interest being valued. It is a detail analysis which includes supporting data most all of its observations. It is a thorough review of many business factors of the underlying business, a tool from which management can often use to make positive adjustments to achieve a "best practices" position for the business at hand.
    
    The size of the other types of valuation analyst's reports can vary.
    
    
16. The following matrix is a comparative summary of information (and an indication of the corresponding work required) that is most often included in the three types of written reports:

	Valuation Engagement	Valuation Engagement	Calculation Engagement
Work area / Report Content	Detailed Report	Summary Report	Calculation Report

 

1. Letter of transmittal	Yes
2. Table of contents	Yes
3. Introduction	Yes
4. Identity of the client	Yes	Yes
a. Purpose and intended use of the valuation	Yes	Yes	Yes
b. Intended users of the valuation	Yes	Yes
c. Identity of the subject entity	Yes	Yes	Yes
d. Description of the subject interest	Yes	Yes	Yes
e. Whether the business interest has ownership control characteristics and its degree of marketability	Yes	Yes	Yes
f. Valuation date	Yes	Yes	Calculation date
g. Report date	Yes	Yes
h. Type of report issued	Yes	Yes	Yes
i. Applicable premise of value	Yes	Yes
j. Applicable standard of value	Yes	Yes
k. Assumptions and limiting conditions	Yes	Yes	Yes
l. Any restrictions or limitations in the scope of work or data available for analysis	Yes	Yes
m. Any hypothetical conditions used in the valuation engagement, including their basis for use	Yes	Yes	Yes
n. If the work of a specialist was used in the valuation engagement, a description of how the specialist's work was relied upon	Yes	Yes	Yes
o. Disclosure of subsequent events in certain circumstances	Yes	Yes	Yes
p. Any applicable jurisdictional exceptions	Yes	Yes	Yes
q. Any additional information the valuation analyst deems useful to enable the user(s) of the report to understand the work performed	Yes
5. Sources of information	Yes	Yes, only as applicable
a. For valuation of a business, business ownership interest, or security, whether and to what extent the subject entity's facilities were visited.	Yes
b. For valuation of an intangible asset, whether the legal registration, contractual documentation, or other tangible evidence of the asset was inspected	Yes
c. Names, positions and titles of persons interviewed and their relationships to the subject interest	Yes
d. Financial information	Yes
e. Tax information	Yes
f. Industry data	Yes
g. Market data	Yes
h. Economic data	Yes
i. Other empirical information	Yes
j. Relevant documents and other sources of information provided by or related to the entity	Yes
6. Analysis of the subject entity and related nonfinancial information	Yes
a. Nature, background and history	Yes
b. Facilities	Yes
c. Organizational structure	Yes
d. Management team, which may include officers, directors and key employees	Yes
e. Classes of equity ownership interests and rights attached thereto	Yes
f. Products or services or both	Yes
g. Economic environment	Yes
h. Geographical markets	Yes
i. Industry markets	Yes
j. Key customer and suppliers	Yes
k. Competition	Yes
l. Business risks	Yes
m. Strategy and future plans	Yes
n. Governmental or regulatory environment	Yes
7. Financial statement / information analysis	Yes
a. Historical financial information, including annual and interim financial statements and key financial ratios and statistics, for an appropriate number of years	Yes
b. Prospective financial information including budgets, forecasts and projections	Yes
c. Comparative summaries of financial statements or information covering a relevant time period	Yes
d. Comparative common sized financial statements for the subject entity for an appropriate number of years	Yes
e. Comparative common size financial industry financial information for a relevant time period	Yes
f. Income tax returns for an appropriate number of years	Yes
g. Information on compensation for owners including benefits and personal expenses	Yes
h. Information on key man or officer's life insurance	Yes
i. Management's response to inquiry regarding:	Yes
i. Advantageous or disadvantageous contracts	Yes
ii. Contingent or off-balance sheet assets or liabilities	Yes
iii. Information on prior sales of company stock	Yes
8. Valuation approaches and methods considered	Based on valuation analyst's expert opinion
a. Income approach	Yes
i. Capitalization of benefits method	Yes
ii. Discounted future benefits method	Yes
b. Asset Approach	Yes
c. Market Approach	Yes
i. Guideline public company method	Yes
ii. Guideline company transaction method	Yes
9. Valuation approaches and methods used, including capitalization rates, discount rates and growth rates used and how such rates were developed	Based on valuation analyst's expert opinion	Based on valuation analyst's expert opinion	Only as to the calculation procedures and scope of work performed, as agreed between client and valuation analyst
10. Valuation adjustments such as:	Based on valuation analyst's expert opinion	Based on valuation analyst's expert opinion
a. Discount for lack of marketability or liquidity	Yes	Yes
b. Discount for lack of control	Yes	Yes
11. Non-operating assets, non-operating liabilities and excess or deficient operating assets	Yes
12. Representations of the valuation analyst – a summary of the factors that guided the valuation analyst during the engagement	Yes	Yes	As adapted for a calculation report
13. Reconciliations of estimates and conclusion of value	Yes	Yes
14. Qualification of the valuation analyst	Yes
15. Conclusion of value, including statements that:	Yes
a. The valuation engagement was conducted in accordance with the Statement on Standards for Valuation Services of the American Institute of Certified Public Accountants	Yes		As to a calculation engagement, Yes
b. A statement describing the conclusion of value, either as a single amount or as a range	Yes		As a calculation of value, Yes
c. Report is signed in the name of the valuation analyst or in the name of the valuation analyst's firm	Yes	Yes	Yes
d. That the valuation analyst has no obligation to update the report to the conclusion of value for information that comes to his or her attention after the date of the report	Yes	Yes	Yes
16. A summarization of the calculated value			Yes
17. Appendices and exhibits	Yes	As Needed	As Needed
18. Disclosure of the valuation analyst's firm's role in the preparation of and responsibility for any underlying historical financial information used in the valuation.	Yes
19. Disclosure of the valuation analyst's firm's role in the preparation of and responsibility for any underlying tax basis financial information used in the valuation.	Yes
20. Disclosure of financial statements prepared by management and the lack of the valuation analyst responsibility for such information	Yes




17. Are just CPAs changing how valuation services are being delivered and the requirements that must be included?

    There is an on-going, profession-wide unification of business valuation (BV) standards. It helps to minimize public confusion as to the "value" of any particular valuation report. In February 2011 the National Association of Certified Valuation Analysts (NACVA) and the Institute of Business Appraisers (IBA) voted to ratify the new principles-based standards developed jointly by a team representing both organizations. The new "principles-based" standards are in parity with the AICPA's SSVS No. 1. These standards become effective to members of NACVA and IBA on June 1, 2011.