Valuation Engagements and Reports

There are several levels of service in providing valuation services in connection with a business valuation and potential M&A transaction. All three levels of service and reports are performed in accordance with the Statement on Standards for Valuation Services No.1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset of the American Institute of Certified Public Accountants, the Professional Standards of the National Association of Certified Valuators and Analysts, and the applicable development and reporting requirements of the Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation.

The three levels of valuation reports are as follows:

Detailed Report – This is the most thorough of the three services and report alternatives. It is typically performed in the context of IRS valuation requirements (estates, gifts, stock compensation) and litigation related engagements and includes, among other procedures, undertaking site visit(s) and management interviews. The report includes a current economic and industry overview, an overview of the business, financial analysis of the business, and valuation of the subject using the most suitable of approaches. It is not uncommon for a Detailed Report to be 100 pages or more. This report does include a “conclusion of value” and is structured to provide sufficient information to permit intended users to adequately understand the data, reasoning, and analyses underlying the valuation analyst’s conclusion.

An IRS related valuation used for estate purposes must be either a Detailed Report or Summary Report. Treasury Regulation 301.6501(c)-1 provides that the adequate disclosure for transfers reported as gifts meet certain requirements in the appraisal report. A report to be attached to a gift or estate tax return must contain the required information as outlined in the Treasury Regulations so that when the return is reviewed, it will provide the reviewer with sufficient information to reach the same conclusion as the appraiser. In addition, IRS Sec. 6695A imposes penalties on appraisals that led to substantial and gross valuation misstatements on returns.

Summary Report – A Summary Report includes all the work done for a Detailed Report but the actual report omits extended economic and industry commentary as well as a detailed explanation of many of the steps that are required in a Detailed Report. Essentially, a Summary Report is a detailed analysis using all available resources to determine a value, but the narrative is limited. Summary Reports are typically 25-60 pages in length. The analysis is not diminished, but rather the presentation is limited. Summary Reports are generally prepared for users that require an independent opinion of value but not a detailed explanation of how the value was derived. If any litigation is contemplated, a comprehensive report is generally required.

Typical uses include (1) private sale to a business acquaintance (i.e. management buyout); (2) buyout of existing co-shareholder; (3) matters where the intended users are “familiar” with the subject to be valued. This report does include a conclusion of value but is intended to provide only an abridged version of the information that would be provided in a Detailed Report and therefore does not include the same level of detail as a Detailed Report.

Calculation Report – A Calculation Report engagement consists of a review of the company’s financial information and application of various appraisal methods to determine an approximate value for the business. A Calculation Report is often all that is required for those considering the purchase or sale of a business (although it does not take the place of any subsequent due diligence process). A range of possible values is generally indicated. It does not include all the procedures required for a valuation engagement and is qualified accordingly that had a complete valuation engagement been performed, the results may have been different. If any litigation is contemplated, Calculations Report engagements are inappropriate.

Typical uses of these reports include (1) understand the relative performance of the business against benchmarks; (2) assisting an owner to establish an initial asking price for the potential sale of a business; (3) developing a potential offer price for a business; (4) exit planning; (5) any other matter where an “initial” or “calculation” of value is acceptable. This report does not provide a conclusion of value but provides a “calculated value” usually presented in a range of values. This report is used for internal purposes only and is not appropriate for any use involving third parties.

Another alternative in certain cases (subject to limitations) is to provide certain valuation and M&A consulting services which could include building models to determine estimated values based on agreed upon approaches and methods (e.g. market value comps, income approach, etc..); reviewing purchase offers for reasonableness of terms and pricing; structuring of a potential sale or merger transaction including purchase price components; and other matters involved in the transaction process. This would be billed on an hourly basis based on our current billing rates.