In a recent Alabama divorce case (Rohling v. Rohling, 2018 Ala. Civ. App. LEXIS 94), the appeals court affirmed the trial court’s acceptance of a calculation of value of the husband’s dental laboratory business.
The husband acted as his own expert in determining the value of his business based on his knowledge, skill and experience in managing the dental lab and its financial matters. The wife hired a CPA, CVA, MAFF to perform a calculation engagement to value the business. The husband’s attorney argued, among other things, that a calculation engagement is not relevant and that a more thorough and accurate valuation engagement should have been performed. However, the husband did not obtain either a calculation of value or full valuation of the business. The court found that the calculated value of the business performed by the wife’s expert was a “reliable basis for determining the value of the dental lab.”
The main difference between a valuation engagement and a calculation engagement 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 his or her 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.
There is no definitive guidance on when a calculation or valuation should be performed and, generally, most valuation analysts do not believe a calculation engagement is appropriate for litigation. It is difficult to determine why the courts accepted the calculation of value in this case, even though it did not include the more in-depth procedures necessary to rise to the level of a valuation engagement. Apparently, the court at least believed the wife’s expert was properly qualified as an expert witness in the case and that he properly followed the standards for preparing a calculation engagement as outlined in the Statements on Standards for Valuation Services issued by the AICPA.
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. Despite the above ruling, one must tread lightly with the idea of using a calculation in a dispute setting. Schneider Downs has significant experience preparing valuation and calculation engagements and routinely assists clients in determining which type of engagement is appropriate. For more information about Schneider Downs’ business valuation and other business advisory services, please contact Joel Rosenthal at 412.697.5387 or [email protected] or Steve Thimons at 412.697.5281 or [email protected].
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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.