Why You Could Need a Calculation of Value

Small business owners, accountants, financial advisors and brokers have various reasons for needing a business valuation. Sometimes their needs are such that they require a full, detailed report to be submitted to the IRS as part of an estate or gift tax filing, a transaction to admit new partners, or a complex litigation matter heading to trial. But what about all of the other circumstances where someone needs a “quick” or “preliminary” value based on a review of limited information without a lengthy, expensive analysis and report? A “calculation of value” is likely a great option.

What is a calculation of value?

A “calculation of value” is, essentially, an agreement between an expert and client to provide basic valuation calculations (not a valuation opinion) with limitations relative to scope, supporting documentation and/or approaches to be applied. If the client would like the analyst to consider limited information and/or provide a short report based on specific approaches, a calculation of value may be the right choice. The result of the calculations can be expressed as a single number or a range of numbers. In this engagement, the scope limitations are clearly defined and the result is not expressed as an opinion of value, but rather a calculation of value based upon the application of limited approaches and/or access to limited information.

The American Institute of Certified Public Accountants (AICPA) defines a calculation engagement as follows:

“A valuation analyst performs a calculation engagement when (1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest and (2) the valuation analyst calculates the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value either as a single amount or a range. A calculation engagement does not include all of the procedures required for a valuation engagement and if a valuation engagement had been performed, the results might have been different.” (1)

Following are a few examples of circumstances which might lend themselves well to a calculation engagement:

  • Ms. Smith, a local attorney, is representing his client Mrs. Anderson in a divorce case. Mr. Anderson has operated a small HVAC business for the past twenty years and the parties are now divorcing. Mediation is in 2 weeks and the only information available on the business is the past five years of tax returns. Due to the short deadline, there will be no opportunity to interview the owner or request additional information. They just need a “preliminary” figure to see if they can settle the case in mediation.

  •  Mr. White is considering admitting a partner to his law practice. He “has a pretty good idea” as to what the value should be, but would like some quick calculations to make sure he’s not way off base.

  • Mr. Blackstone, a local attorney, is representing a partner in a dispute among the partners. They would like a “quick and dirty” estimated value to determine if the settlement offer made by opposing counsel is reasonable.

If you have business valuation questions or would like more information about calculations of value, contact us.

American Institute of Certified Public Accountants (AICPA), Statements on Standards for Valuation Services; VS Section 100;