Understanding calculation versus valuation engagements
There are two primary formats a valuator may use to determine and report the value of your business: calculations and valuations.
Both will provide you with an estimate of value for your business, but they cannot be used interchangeably. Each type of engagement is typically better suited for certain uses and audiences.
What’s a calculation? What’s a valuation? What’s the difference?
The main difference between calculation and valuation engagements is that calculations are considered a lower-level service, while valuations are the highest, most complete level of appraisal service offered.
For both engagements, the results are typically presented in a written report that documents, with varying levels of detail, the scope of the work performed and the results obtained. But because of differences in the procedures performed and reporting requirements, the contents of the report — and even the estimated values — can vary.
Here are four key differences between calculations and valuations:
1. Scope
A calculation is more limited, since it does not usually include all the procedures required for a valuation. The appraiser will work with the client to determine the scope of the engagement, collaborating to select the valuation methods and limited procedures required to ensure that the report meets the client’s needs.
When performing a valuation, the appraiser is required to consider each valuation method, applying all that are deemed applicable. They also have to perform and report on the research and procedures necessary to support the concluded value, which often includes conducting analyses relating to historical and expected performance/patterns in the subject company's financials and regarding the condition and trends of relevant industries and economic areas.
2. Results
Calculations result in a calculated value and only require a calculation report. Calculation reports have fewer mandatory components than a valuation report, per valuation standards.
Since calculations do not necessarily include all the applicable procedures and valuation methods, calculation reports should also have a statement explaining that the results may have been different if a valuation engagement had been performed instead.
Valuations result in a conclusion of value. Their written reports may be in the format of a detail or summary report. Both explain the data, reasoning and analyses underlying the development of the concluded value, to varying extents.
3. Audience
Both engagements can be used for internal or external audiences. However, it’s typical to use calculations internally and valuations externally.
Calculations are usually meant to inform management about a company’s value or the value of separate company interests. They’re often used when a client wants to contain costs and a preliminary value is sufficient.
Valuations are usually used when an outside authority, such as the court or IRS, requires a report on the value of a company or its interests.
4. Burden
Calculations are generally easier, faster and less costly.
Because valuations are more comprehensive, they usually take longer to complete and are more expensive. They also create a larger administrative burden on a business.
Choosing between calculation and valuation engagements
When choosing between the two engagements, consider the purpose first.
If the report will be relied on by an outside authority for tax reporting or litigation purposes, you typically need a valuation.
In most cases, a calculation will be deemed unacceptable for such purposes since calculations do not always consider every possible valuation method.
They also result in a calculated value instead of a conclusion of value. And their brief reports may not fully describe the support for that value.
You will also need to consider the intended users of the report.
When business owners, management or a potential buyer are the only intended users, a calculation of value is often preferable. Calculations are less burdensome on the company, and you can work with the appraiser to determine the valuation methods that best fit your purposes.
How Wipfli can help
No matter what engagement you need, Wipfli is here for you. Our team can guide you through the process, helping you select the right type of engagement to fit your needs.
Contact us to discover how we can help you determine the value of your business.
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