Over-Buying Valuation Work


Litigation, estate and gift tax planning, financial and business succession planning, Family Court, and bankruptcy are some of the most common circumstances requiring a business valuation. Many believe that the process is inordinately expensive and, in some cases, do not get the work done because of the perceived cost. It is common in our office to take a phone call from someone fully prepared to over-pay for valuation work. We talk ourselves out of business all the time.

There is a great potential to misunderstand the level of valuation service that is required, and the following cases illustrate that point and inform of the range of available services. The key difference in the cost of a valuation is the amount of written reporting required. In short, not every valuation engagement requires a report of 100+ pages.

Calculation of Value
It is common in a shareholder dispute or upon the death, retirement, disability, or other separation of a partner/shareholder in a business that the buyout provisions of the shareholder agreement come into play. The starting point of analysis, whether in litigation or negotiation, is to figure out the buyout price based on the written agreement. We receive a lot of calls requesting our help with this and it is common that the caller is surprised that this is probably a relatively inexpensive engagement. Since the method of valuation is being dictated by the written contract, this type of work is described by the professional standards as a calculation of value. The only documents needed are a copy of the shareholder agreement and the relevant financial reporting dictated by the methodology described in the agreement. There is no need for a full-disclosure business valuation report in this situation. A short report disclosing the calculation is all that is needed.

Summary Report
When we receive a phone call from a group of owners wondering what their business is worth, either for planning or transaction purposes, we explain that they do not need a full-disclosure report. More likely, they need a brief (summary) report that explains the value of the business and how it was determined. In any case where a tax, regulatory, or judicial authority is not requiring a report, a summary report is likely adequate and should be considered. A summary report is significantly shorter in length without the depth of a full-disclosure valuation report. The same analysis and development work is done to determine the value of the business but the report is shorter excluding much of the detail that may not be relevant to the users, anyway. It is also of note that in this example the business appraiser can report on a range of values rather than a single number. There is no reason to pay for the precision of a single number. It is likely more helpful and relevant to have the business appraiser provide a range of values and describe the variables that will impact the sale price. The ability to provide a range of values reduces the amount of analysis and documentation required to arrive at a single number thus costing less.

Full–disclosure Report
There are cases where a full disclosure report is required. In a valuation practice like ours, this is rare. Even in matters of litigation, it is rare that a full disclosure report will be written. The exception to this is Federal court where the rules require a full-disclosure report. Additionally, a full disclosure report is required for ESOP, Gift tax, estate tax, and income tax purposes.

Oral Report
Most users of valuation services do not realize that one option available is an oral report. Obviously, this is the least expensive and is particularly helpful and useful to a sole proprietor, single shareholder, or even a small group of owners who, for various reasons need a “ballpark” estimate of the value of the business.