ValuAdder Business Valuation Blog

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If there is one professional endeavor that has a lot of proverbial moving parts, it is business valuation. Small wonder there is a number of standards that govern how you should conduct your business appraisal.

A relatively new comer to the field is the Statement on Standards for Valuation Services or SSVS No 1 for short. Published by the American Institute of CPAs (AICPA), the standard is very detailed and yet provides great flexibility in how you can handle your valuation projects.

One key feature that sets SSVS No 1 apart is the so-called Calculation Engagement format. It is unique in that it allows the client and their appraiser to agree up front on the scope and extent of valuation analysis. Unlike other standards, such as the venerable USPAP and International Valuation Standards (IVS), under the SSVS No 1 framework you can outline the scope of business value analysis together with the client.

Why this level of latitude? In times past, the business appraiser had the sole discretion in deciding which valuation approaches and methods to use. The client was expected to provide the needed business information and leave the rest in the hands of their trusted appraiser. The finished business valuation report would be transmitted to the client detailing the work done and the business value conclusion reached.

This changed with the advent of the SSVS No 1. Now the client and appraiser could limit the scope, time, and expense of business valuations by resorting to the concise Calculation Engagement format. If both sides agree at the outset on what needs to be done and accept the implications of taking this shorter route, then there should be no unpleasant surprises.

Even so, the SSVS No 1 is careful in promoting calculation engagements. The language used alerts you right away this is not a typical business valuation: the report work product is called a calculation report. Instead of the usual conclusion of value, the result is reported as the ‘calculated value’.

In addition to stating the intended audience of the report, the appraiser is encouraged to limit its use. For example, you may read that the calculation report is for the client’s eyes only and should be used for management information purposes and nothing else.

Since limiting the number of valuation methods and approaches may miss some hidden gotchas, your calculation report should spell this out by stating that had the more comprehensive valuation engagement format been used, the business valuation result could have been different.

In other words, the client is put on notice that reducing the level of business value analysis could produce less accurate results than the full scope business valuation.

Interestingly, the IVS standard frowns on such shortcuts and suggests that client requests to limit the analysis should be discouraged. If the business valuation expert is unable to convince the client of the need to go through business valuation in sufficient detail, the professional should decline the project as non-viable.

Unsurprisingly, opting to run a Calculation Engagement pretty much means that you forgo compliance with either the USPAP or IVS standards. If you are doing a valuation project outside the USA, this will not work as these two major standards will likely prevail internationally.