What is a “certified” business valuation report?
Not all business valuations are equally reliable. A “certified” business valuation adheres to professional valuation standards, conducted or reviewed by a business valuator who is certified by a professional, accredited organization, such as the National Association of Certified Valuators and Analysts (NACVA). There are individuals and firms offering business valuations (written or oral) that do not follow professional valuation standards and are not conducted by a business valuator, which raises questions of reliability and increased financial risk for your business.
Why is it important to obtain a certified business valuation report?
A business valuation report issued by a firm with certified valuators holds credibility. Whether you are a business owner contemplating the sale of your business, a banker needing a detailed report for an SBA-backed loan or a lawyer needing an expert for a legal case – you will want to obtain a valuation report that is credible and protects you against others from discrediting the valuation.
A business valuation report issued by uncertified valuator exposes you to unnecessary risks – you want to avoid leaving money on the table during the sale of your business, your bank from failing an SBA audit or losing a legal dispute on behalf of your client.
A business valuation report from a firm that adheres to professional business valuation standards and who employs certified, highly educated business valuators will help protect you against these unnecessary risks.
What’s included in a certified business valuation report?
A detailed business valuation report (written or oral) that adheres to the National Association of Certified Valuators and Analysts (NACVA) standard must be coherent, supportable, and understandable. Many reports can fall short of valuation professional standards or if they adhere to standards, the reports are overly technical and hard to read. BizWorth valuation reports are easy to read and understandable. We’ve gone to great lengths to ensure our reports can be read by business owners as well as by financial and legal professionals without sacrificing quality or adherence to professional valuation standards.
Valuation reports from uncertified individuals and firms not adhering to professional valuation standards typically overemphasize financial ratios and market-based valuation approaches. Some of these reports are very flashy and professional-looking, but lack basic analysis and support for the valuation.
A detailed report that adheres to professional valuation standards should include the following sections titled using wording similar in content to that shown below:
2. Table of Contents
3. Introduction, may include:
b. Purpose and use of the valuation
c. Description of the interest being valued
d. Ownership size, nature, restrictions and agreements
e. Valuation date
f. Report date
g. Standard of Value and its definition
h. Identification of the premise of value
i. Scope limitations
j. Material matters considered
k. Hypothetical conditions/assumptions and the reason for their inclusion
l. Disclosure of subsequent events considered
m. Reliance on a specialist
n. Denial of access to essential data
o. Jurisdictional exceptions and requirements
4. Sources of information
5. A description of the fundamental analysis, may include:
b. Adjustments to historical financial statements
c. Adjusted financial statement summaries
d. Projected/forecasted financial statements including the underlying assumptions
e. Non-operating assets and liabilities
f. Valuation approaches and method(s) considered by the valuator
g. Valuation approaches and method(s) utilized by the valuator
h. Other items that influence the valuation
i. Site visit disclosure
j. Reconciliation of estimates and conclusion of value
6. Identification of the assumptions and limiting conditions
7. Representation of the valuator, may include:
b. Disclosure of any contingency fee
c. A statement of financial interest
d. Whether or not valuator is obligated to update the report
e. Responsible valuator signature—the valuator who has primary responsibility for the determination of value must sign or be identified in the report
8. Qualifications of valuator
9. Appendices and exhibits
A summary report is an abridged version of the information that would be provided in a detailed report (as outlined above).
Should I use my CPA to certify the value of my business?
It makes logical sense to consider engaging your local CPA to conduct your business valuation since s/he already has access to your financial statements and tax returns. However, if your CPA is not a certified business valuator, then the valuation report will not be as credible and hold the same weight with third-parties, exposing you to unnecessary risks. You want to weigh the pros and cons of working with a local CPA who may only conduct a few valuations per year, if any. These individuals may not be up to speed on changes in professional valuation standards, knowledgeable of applicable case rulings or have access to the same transactional databases as a firm who exclusively focuses on business valuations.
Reasons why certified business valuations are needed?
There are many reasons why you may need a business valuation. If you’re a business owner, you may need a business valuation to support a full or partial sale of your business, a buy/sell agreement with a business partner or a potential capital infusion. If you’re a CPA, you may need a business valuation of your client’s business to support a purchase price allocation. If you are an insurer, it’s commonplace that you may need a loss/profit calculation for a claim. Certified financial planners and lawyers also routinely need business valuations to support client work. Below is a list of some common reasons why business valuations are needed by our clients:
• Sales and divestitures
• Buy/sell agreements
• Banks – loan applications
• Business planning
• Retirement planning
• Fairness opinions
• Share redemptions
• Shareholder transactions
• Capital infusions
• Expert testimony/litigation support
• Estate planning and taxation
• Gift taxes
• Purchase price allocations
• GAAP valuations
• Employee stock ownership plans (ESOPs)
• Employee benefit plans
• Solvency opinions
• Insolvency opinions
• Collateral valuations
• Charitable contributions
• Determination of net operating loss in bankruptcy
• Determination of liquidation value in bankruptcy
• S Corporation Elections – calculation of built-in gain per asset
• Marital dissolutions