When a business owner needs to determine the value of a business, two options are available: a valuation engagement or a calculation engagement. A calculation engagement is more limited in scope and is typically much less expensive than a valuation engagement. (Click here for a full explanation of the differences between the two).
When a valuation is needed for litigation, many valuation analysts encourage the use of a valuation engagement over a calculation engagement. Some analysts won’t even provide a calculation engagement if litigation is possible. However, under the right circumstances, a calculation engagement can and perhaps should be used in litigation. Here is what you need to know.
Professional standards don’t require valuation engagements in litigation
The first thing to know is that there is nothing in any of the standards that govern credentialed analysts that forbids the use of a calculation engagement in litigation. So whether an analyst holds the credential of ABV from the AICPA, CVA from NACVA, or ASA from the American Society of Appraisers, all standards allow the use of a calculation engagement in litigation. In fact, the standards don’t specify the use of either a valuation or a calculation engagement for any of the purposes that require a business valuation.
A calculation can help settle a case
If the disputing parties and their attorneys agree to the use of a calculation engagement to determine a value, a calculation engagement may be all that is needed to help settle a case. In the event the parties are unable to reach an agreement, each party can then decide whether a full valuation is necessary for trial.
A full valuation doesn’t always make sense
A full business valuation requires the valuator to consider all three valuation approaches. But in certain cases, only one approach may be relevant to the case, making a full valuation unnecessary. For example, in Florida, the personal goodwill of the owner of a business is usually not considered a marital asset and is not subject to equitable distribution. Therefore, for businesses where the only goodwill is personal goodwill, a calculation engagement that uses the Asset-Based Approach is probably sufficient, even if the case goes to trial.
A calculation might be sufficient in court
In other cases, a calculation may be sufficient even when a full valuation is preferable but unaffordable. Many judges and attorneys recognize that a less expensive calculation engagement may be the only choice when financial resources are tight. If both parties can agree ahead of time to rely on a calculation engagement, even if it goes to trial, the savings could be significant.
How to choose
The best way to determine if a calculation engagement may be suitable in your situation is through an in-depth conversation with an experienced valuation analyst and your attorney. If you have any questions, please contact our offices.