Business Valuators & Their Product Can Come in All Shapes and Sizes

By Heather Deskins, CPA/ABV/CFF, CFE, CVA

Business valuations can be prepared by a CPA (Certified Public Accountant) with no other credentials or a valuation credentialed professional without being a CPA. Having a valuation credential provides some assurance that the individual had some valuation related training. There are numerous business valuation credentials available, each one having their own requirements. The four major organizations that offer a business valuation credential, along with their credential(s) are as follows:

Certification Organization / Certification Other Required Credentials Experience in BV
1. National Association of Certified Valuation Analysts (NACVA)
a. Certified Valuation Analysts (CVA) CPA None
b. Accredited Valuation Analyst (AVA) None 2 yrs or 10 BVs
2. American Institute of Certified Public Accountants (AICPA)
a. Accredited in Business Valuation (ABV) CPA 6 engagements
3. Institute of Business Appraisers (IBA)
a. Certified Business Appraiser (CBA) None Yes
b. Business Valuation Accredited for Litigation (BVAL) Yes Yes
c. Accredited in Business Appraisal Review (ABAR) Yes Yes
4. American Society of Appraisers (ASA)
a. Accredited Senior Appraiser (ASA) None 5 yrs
b. Accredited Member (AM) None 2 yrs

Each organization has its own set of valuation standards; however, NACVA and IBA have voted to ratify their new principles-based standards developed jointly to comply with the AICPAs valuation standards, Statement on Standards for Valuation Services (SSVS) No. 1. The ASA business valuation standards are to be used in conjunction with the Uniform Standards of Professional Appraisal Practice (USPAP) of The Appraisal Foundation and the Principals of Appraisal Practice and Code of Ethics of the ASA.

SSVS No. 1 is becoming the top business valuation standard valuation that professionals are relying on. SSVS No. 1 became effective for engagements accepted on or after January 1, 2008 and defines two types of engagements: valuation engagements and calculation engagements.

Valuation engagements require that a valuation analyst apply valuation approaches or methods deemed in the member’s professional judgment to be appropriate under the circumstances and results in a conclusion of value. Valuation engagements can be either written, as a detailed report or summary report, or presented as an oral report.

Calculation engagements occur when the client and valuation analyst agree to specific valuation approaches, methods and the extent of selected procedures and results in a calculated value. Calculation engagements can be expressed in a calculation report or as an oral report.

In a valuation engagement, the valuation professional should follow these developmental standards:

  1. Analyze the subject interest,
  2. Consider and apply appropriate valuation approaches and methods, and
  3. Prepare and maintain appropriate documentation.

A valuation performed for a court, an arbitrator, a mediator or other facilitator, or a matter in a governmental or administrative proceeding is exempt from the reporting provisions stated below; however, the litigation waiver does not relieve the member from complying with the development standards stated above.

Depending on the type of written valuation report issued, detailed or summary, influences the amount of detail provided. A detailed report should include the following sections:

  • Letter of transmittal
  • Table of contents
  • Introduction
  • Source of information
  • Analysis of the subject entity and related nonfinancial information
  • Financial statement/information analysis
  • Valuation approaches and methods considered
  • Valuation approaches and methods used
  • Valuation adjustments
  • Non-operating assets, non-operating liabilities, and excess or deficient operating assets (if any)
  • Representation of the valuation analyst
  • Reconciliation of estimates and conclusion of value
  • Qualifications of the valuation analyst
  • Appendices and exhibits

The summary report does not need to contain the same level of detail as the detailed report; however, it should include the following:

  • Introduction
  • Source of information
  • Valuation approach used
  • Representation of the valuation analyst
  • Reconciliation of the estimates and the conclusion of value
  • Appendices and exhibits

As indicated above, a calculation report is the only report that should be used to report the results of a calculation engagement. The calculation report should include:

  • Portions of the Introduction
  • Representation of the valuation analyst
  • Summary of the calculated value
  • Appendices and exhibits

There is not one type of report that would work for every business. It is something that needs to be discussed and agreed to by the clients and their legal counsel. Here are some items legal counsel can discuss with their clients than can help make that decision:

  1. Request and review five years of tax returns and/or financial statements.
    1. Is the business profitable?
    2. Does the business have positive equity (more assets than liabilities)
  2. Discuss the nature of the business with the client.
    1. Does the business provide more than a reasonable salary to the owner?
    2. Does the owner run any personal expenses through the business?
    3. What is the owners’ economic income from the business?
  3. What is the clients’ perception of the business?
    1. Does the client believe the business has value over and above the equity of the business?
  4. Are the clients able to stipulate to the value of the business?
  5. What is the owner taking out of the business?
    1. Salary, Bonus?
    2. Distributions?
  6. Have a valuation analyst, as a consultant, review the financial records and give a recommendation on valuation issues.

Whether a client owns a majority or a minority interest, the clients and their legal counsel should discuss the options available and determine the best possible solution with regard to their specific situation.

If you have a question or a need for business valuation services, please give P.D. Eye a call.

Heather Deskins, CPA/ABV/CFF, CFE, CVA

Heather Deskins,

Managing Member
P.D. Eye Forensics, LLC