Tax Advisor-Business Evaluation-CPA
By: Todd Schanel, CFA, CPA, CFP®
on March 9, 2019

Many business owners complain that business valuations are too expensive. Fortunately, in many situations, a less expensive calculation engagement is perfectly adequate.

However, there’s a great deal of confusion and misinformation about calculation engagements, so let’s review some frequently asked questions.

Is a calculation engagement a “real” valuation?

Yes! All three organizations that train and accredit business valuation professionals recognize calculations as an acceptable option. The standards for the AICPA, NACVA, and ASA use similar language to describe the objectives of a calculation engagement and include procedures that must be followed.

Whether an analyst is performing a full business valuation or a calculation engagement, the professional standards require that the analyst will apply professional judgment, obtain sufficient relevant data for the analysis, exercise due professional care, remain objective, and retain professional integrity.

Why is a calculation engagement so much cheaper than a full valuation?

The difference in price between a calculation engagement and a full business valuation has to do with the difference in the scope of work.

A full business valuation requires consideration of the three methods for valuation as well as any other factors that could impact the value of the business, including local economic conditions, the market strength of the company, the level of talent at the company, and any special risks inherent to the company. A full business valuation includes a formal written report, which may be well over 100 pages long.

A calculation engagement, in contrast, can be completed using a single valuation approach and does not require an analysis of economic conditions, market strength, and other factors.  In addition, calculation engagements do not require a formal written report.  In fact, a calculated value can actually be communicated orally.

Are there situations where a calculation is better than a valuation or vice versa?

The standards do not specify any circumstances where a valuation must be used, or where a calculation cannot be used. The best choice between the two options depends on the situation, the professional judgment of the analyst and the agreement reached with the client.

In general, calculation engagements are a good choice in friendly, handshake-type agreements when litigation is not anticipated. But even in some litigation situations, a calculation engagement may be useful as a preliminary step or in the context of mediation, with the caveat that a full valuation engagement may be performed later.

If the valuation will be examined by the IRS as part of an estate tax return, a full valuation engagement will likely be required.

But calculation engagements aren’t as detailed. Doesn’t that leave room for errors?

Errors are possible in any valuation engagement. And while it is true that a calculation engagement and a business valuation may result in different outcomes, that is not always the case.  In all cases, it is up to the analyst to exercise professional judgment and to act with integrity when performing the work.

Can a client “rig” a calculation engagement to get the result they want?

In a calculation engagement, because the analyst and the client agree to the valuation approach ahead of time, some have argued that a client might be able to “rig” the valuation to get the result they want by steering the analyst toward a particular approach.  But the reality is that even professional analysts who have been doing this work for decades have a hard time predicting which valuation approach will result in the highest (or lowest) value.  Therefore, it’s hard to imagine that a client with limited experience in valuation will be able to predict the outcome ahead of time.

But even if it was possible, it is the responsibility of the valuation analyst to educate the client and help them select the right kind of engagement, and in the case of a calculation engagement, the appropriate valuation approach and scope of work.

How do I choose?

The best way to choose between a calculation and a full valuation is to have a candid conversation with a professional analyst. An accredited analyst will adhere to his or her professional standards and will help you understand which is best for you and your situation.

Contact our office today to find out if a calculation engagement is right for you!

Schanel & Associates is a CPA firm specializing in accounting, tax, business valuation and litigation support serving Palm Beach, Martin and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.
Todd Schanel has been a principal at Schanel & Associates since 2004, where he specializes in financial planning, tax planning and consulting services. He also serves as Founding Principal and Director of Investment Advisory Services at Core Wealth Management, our sister company, where he leads an accomplished professional team offering independent and objective financial advice to help clients achieve their financial goals. Todd has been a CFA Charterholder since 2005, and in 2007 he earned his Certified Financial Planner® designation and became a licensed CPA. In 2015, he earned the Certified Valuation Analyst (CVA) designation.