by Tony Carter
Depending on you circumstances, there are several different types of valuation engagement that can be undertaken. These include:
- Calculation Engagement
- Limited Scope Engagement
- Full Valuation Engagement
- Shadow Expert Report
- Business Appraisal
All valuation engagements are completed for a fixed price, quoted up front and turned around within a week.
One of the most common questions client have when they need to undertake a valuation is what type of valuation do I need to undertake? The answer to this question will vary depending on why you are engaging the Valuer and if the valuation is going to be used as evidence in court.
The Accounting Professional & Ethical Standards Board has issued APES 225 Valuation Services. This is a professional standard for valuation work and compliance is mandatory for members of professional accounting bodies in Australia. This standard sets out three different types of engagement as follows:
A calculation engagement is an engagement where the Valuer and the client agree on the valuation approaches, valuation methods and valuation procedures the Valuer will employ.
This is the lowest level of valuation; a calculation engagement generally does not include all of the valuation procedures required for a valuation engagement or a limited scope valuation engagement.
The following circumstances are when a calculation engagement would normally be undertaken:
- Where there is a shareholders agreement setting out how the business is to be valued.
- For micro businesses where a rule of thumb is applied to calculated the business value.
- When a vendor wants to determine the listing price for the potential sale of their business.
- At the early stages of negotiation where the client wants an independent option of valuation.
A limited scope valuation is where the scope of work is limited or restricted. The scope of work is limited or restricted where the Valuer is not free to employ valuation approaches, valuation methods and valuation procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the engagement. The effect of the limitation or restriction on the estimate of value is material. The limitation or restriction will be known at the outset of the engagement or will arise during the course of the valuation engagement.
The following circumstances are where a limited scope valuation engagement is normally undertaken:
- The information requested by the Valuer has not been made available.
- When a minority shareholder engages the Valuer and does not have full access to all the business records.
- When the spouse of the business owner engages the Valuer to value a business for a family law property settlement and they do not hold an ownership interest in the business.
- Where the financial reports have not been completed by the business accountants for a number of years. And or;
- Other information provided to the Valuer have errors,
- Information provided to the Valuer do not reflect the actual trading of the business, this may occur in industries where there are large cash payments or for businesses that have dealings with related parties.
A valuation engagement is an engagement where the Valuer is free to employ the valuation approaches, valuation methods and valuation procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the engagement available to the member at that time.
This is the highest level of engagement when preparing a business valuation and is the engagement that needs to be undertaken if there is any chance the valuation will be used as evidence in court.
The most common form of valuation undertaken is a valuation engagement. This is the default engagement unless one of the circumstances listed under the calculation engagement or limited scope engagement occur.
Where a valuation has already been undertaken and needs a review, a shadow expert report often is completed to address any issues or concerns with the valuation.
This report is normally undertaken when:
·There may be issues with independence in relation to the original valuation report
·To provide a second opinion on the valuation
·The underlying assumptions in relation to the valuation have changed
·Material events subsequent to the preparation of the valuation have occurred
Often when clients are considering purchasing a business they seek the advice of a valuation specialist to determine whether they should go ahead with the acquisition. Rather then undertaking a valuation engagement, often in this situation it is more appropriate to undertake a business appraisal.
A business appraisal not only reviews the purchase price but also summaries the risk profile of the business and industry in which it operates. The appraisal has a much broader focus then a business valuation and provides the purchaser with an overall picture of the business to allow them to make an informed decision about the purchase.
Business valuations and appraisals address the following areas in detail:
- Summary of the acquisition cost including legal fees, stamp duty and initial working capital requirements.
- Analysis of the current business operations.
- Summary of the businesses financial performance, including:
- Business benchmarking
- Major expenses
- Budget projections
- Payback period
- Return on investment
- Break even point
- A breakdown of the assets being a acquired, including:
- Plant and equipment
- Review of competition;
- Summary of the financing options; and
- Recommendation in relation to the acquisition.
All the above engagements are completed for a fixed price. Quoted up front and completed within a week.