OUR THOUGHTS ON:

Why Not Just Get a Calculation Instead of a Valuation?

Business Advisors

By Dan Riske

The answer to this question depends on the situation.  In 2012, another member of the Schneider Downs Business Advisory Services team, Jen Doering, wrote an article outlining the differences between a calculation engagement and a valuation engagement when performing business valuation services. This article serves as a reminder of some of the lessons learned from Jen’s 2012 article and provides some additional information on how to choose between a calculation or valuation engagement when seeking business valuation services.

The main difference between a valuation and a calculation is that a valuation results in a “conclusion of value” and relies on the valuation analyst’s judgement to apply all valuation approaches and methodologies deemed appropriate to determine the value of a business, resulting in the analyst providing their opinion on the value of the business.  A calculation, on the other hand, involves the client instructing the analyst to apply certain valuation procedures to the subject business and the analyst provides a “calculation of value” in compliance with the client instructions.  Therefore, a calculation engagement does not provide an analyst’s opinion of value since only client-directed, and often limited, valuation procedures are performed. 

Given that calculations of value involve limited valuation procedures, and therefore often require less of a time commitment from the analyst, fees for calculation engagements are normally lower than for valuation engagements.  So, why not just get a calculation instead of a valuation?  There is no definitive guidance on when a calculation or valuation should be performed.  However, the two main organizations that regulate valuation services, the IRS (in the case of estate and gift tax valuations) and the SEC (in the case of fair value valuations for public company financial reporting), generally prefer that a valuation is performed, and may find that a calculation is not appropriate.  In addition, an attorney might require a valuation when preparing an analysis for a litigation matter, because a valuation is a more in-depth analysis than a calculation.

A calculation is normally appropriate when it is not likely that the value will be reviewed by an outside party (e.g., the IRS or SEC) or be subject to litigation.  Examples of when a calculation engagement might be appropriate include the following:

  • Helping a client understand the value of their company, to determine whether an offer to purchase their company is reasonable;
  • Helping a client calculate a value for a potential acquisition target, in order to make a successful purchase offer; or
  • Helping a client understand the value of their company for various corporate planning purposes (and the value will not be shared with outside parties).

A calculation of value can be a time-saving and less expensive alternative to a full valuation; however, deciding which option is appropriate depends on the individual situation and must be discussed with your attorney and/or valuation analyst before a decision is made.  Schneider Downs has extensive experience preparing valuation and calculation engagements and routinely assists clients in determining which type of engagement is appropriate.  Contact us if you have questions and visit the Schneider Downs business valuation and business advisory webpages to learn about the services that we offer.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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