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BVUpdateTM - November, 2012 (BVUpdate) - Business Valuation

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Business Valuation Library | BVUpdate
BVUpdateTM - November, 2012 (BVUpdate)
A Busine ss Valuation Library Publication,
Guest Article
Calculations, Appraisals and How to Satisfy Clients
By Richard Warner, ASA, AVA
A recent discussion on LinkedIn takes up the question of whether accredited
senior appraisers (ASAs) are permitted to perform “calculation engagements.”
Participants are interested in what constitutes a calculation engagement and
how this differs from an appraisal. In part, the discussion provides a dissection
of the various professional standards in place applicable to the work that we do
as appraisers.
These are interesting questions for those of us in the valuation field, and not as
straightforward as they may first appear. The American Society of Appraisers’
business valuation standards provide a definition of a calculation engagement,
as do the AICPA and NACVA standards. Basically the calculation provides an
“approximate indication of value.” The scope of work for the supporting analysis
is less than that for an appraisal, and the reporting requirements for calculations
offer considerable flexibility to the appraiser with regard to what ultimately ends
up being reported, or even how it is reported (written or orally). Why does such
a work product as a calculation even exist? I can think of only one reason: cost.
Clients don’t want to pay any more than they have to for whatever work product
meets their needs.
At some point, someone must have thought about the types of engagements
where an appraisal is required and others for which a work product with a more
limited scope would suffice. It used to be that reports submitted in support of
certain tax-related issues needed to be in the form of an appraisal, but I’ve even
seen this thinking challenged recently. Some suggest that if a valuation issue
will be litigated, then you want the most comprehensive analysis possible, in
the form of an appraisal. When a client is simply in the planning phase (say for
the possible sale of a business) or in a prelitigation settlement discussion phase
(perhaps in a divorce), maybe a more limited, less costly work product will do.
But just to keep things interesting, is the requirement for ASA accredited
members and candidates to be in compliance with USPAP? USPAP does not
provide for a work product called a “calculation.” Some have interpreted these
writings to suggest that ASAs cannot engage in a “calculation engagement,” nor
can they provide a more limited “calculation report.”
So keep this in mind as we turn to the issue of what clients think about and
what they need to know about the differences between calculations and
Let’s walk through a pending divorce and role-play a bit to see where this goes.
Let’s also assume that my client is an experienced attorney, who is comfortable
with valuation issues.
Business Valuation Library | BVUpdate
The attorney contacts me, explains that she and her client need a valuation
because they are in the early stages of a divorce and need some information for
possible settlement discussions. The business in question is an operating entity
with, say, $2 million to $3 million in revenue. The business got beat up during
the recession, but now appears to be digging out. The end client doesn’t have a
lot of money to spend on a valuation and only needs a number for preliminary
discussions with opposing counsel.
For me as an appraiser to start a discussion with “Well, a comprehensive
appraisal that will be used in court will cost between $8,000 and $12,000” is
generally a nonstarter. A “calculation engagement” is a deliverable that might
make sense here.
But do both the client and his or her attorney really understand what is being
offered here? What are the limitations to a calculation engagement? What’s
included? What’s not included in a calculation that is included in an appraisal? If
I limit my valuation methodology to a capitalization of earnings, will that
provide a number that is anywhere near reality for the client? Are there limits to
how this deliverable can be used? How approximate will the number be that you
provide in the calculation engagement?
These and others are all questions that, as appraisers, I’m not sure we take
enough time to talk about with the client or client’s counsel. I think it’s always
challenging to set expectations properly for one of these types of engagements.
Think about it. I’m going to give my client a “calculated value.” But maybe I
didn’t do a full economic analysis; maybe I didn’t do an industry analysis; maybe
I relied on a single cost of capital estimate; perhaps my financial analysis was
otherwise limited. The question becomes: “At what point do the limitations
inherent in a calculation engagement limit its ultimate usefulness?” If my
analysis is so limited as to call into question the range of value to be assigned
to whatever it is that I’m appraising, then why would a client ever pay for that?
Well, as my father often told me, “It’s not a perfect world.” So given the
realistic, pragmatic needs of clients and our ability as appraisers to deliver
something called a calculation to clients, what should we do to make this type
of engagement as satisfying as possible for all concerned? Here are my
Engage in plain-spoken, blunt conversations with the attorney and the
client about what type of analysis will be included as part of the
engagement; discuss the impact of not doing certain types of analysis.
For example, if you’re not going to do a full industry analysis, talk about
how this might impact any indication of value provided.
Talk about how the deliverable can be used and how it cannot be used.
If the deliverable cannot be used in open court or as the subject of any
deposition proceedings, make sure everyone understands this and what
this means.
Be prepared for both the attorney and the client to refer to your work as
“an opinion” or “your appraisal,” when, in fact, your calculation is neither.
In fact, try to make sure these words never show up in your calculation
Business Valuation Library | BVUpdate
Take a look at the last year or two of company financials before even
completing an engagement letter. I can’t tell you how many times I’ve
gotten roped into engagements thinking that the business was a simple
operating business and then found out that the capital structure of the
company was much more complex than imagined, that excess
nonoperating assets were in play, that significant adjustments would be
required to the income statement to get to anything resembling an
approximate value for the company, that the entity was a pass-through
entity, that significant net operating losses were present, etc. Shame on
Be prepared to walk away from such engagements; this is really easy to
say, but hard to do in practice, especially if the attorney involved has
been a source of referrals in the past. Remember, if there really is a
need here, somebody’s going to do the work. Only you can decide if the
risk/return for taking the engagement makes sense for you and your
The plain fact is that calculations are part of what we as appraisers can be
expected to deliver at some time during our career. They may, in fact, make up a
majority of the work that we do. Maybe the best that we can do is go into these
engagements with our eyes wide open and help our clients understand what
exactly it is that they are contracting with us to deliver.
On a related note, it would be helpful for the various standards bodies to
remove any ambiguities with regard to ASA-accredited members and candidates’
ability to engage in these types of calculation engagements. Pragmatically, no
one should assume that ASAs will walk away from this significant share of the
market for valuation services.
Richard A. Warner, ASA, AVA, is a principal at Great Lakes Valuations. He can
be reached at
Last update:
10/11/2012 12:10:11 PM
Article #12574
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