Valuation Uses
Business Valuation Example Uses
Main categories and distinctive characteristics of different valuation reports
Business valuation presents multiple uses such as litigation, IRS appraisals for gift & estate taxes and charitable contributions, SBA loans, IFRS and GAAP financial reporting compliance, calculation of value for internal transitions like management buy outs, among many others. OneTriad has identified below the main categories and their distinctive characteristics of valuation reports:
Calculation of Value Engagements: this type of valuation engagement is utilized by company owners and management teams to derive an estimated value for privately-held businesses. A “calculation” consists of a collaborative work between management and the valuation specialist. As opposed to an unbiased opinion of value (i.e. IRS appraisal), the valuation professional takes into account management’s inputs and feedback on the company’s value, which might differ from the independent analysis and judgement from the valuator.
Tax Appraisals: represent an unbiased estimate of value. Valuation inputs are independently derived from the appraiser’s in-depth analysis of the company’s industry, historical trends, financial statements and broad macroeconomic factors. Unlike the a calculation of value engagement, tax appraisals require extensive documentation on valuation inputs, different valuation methodologies used throughout the appraisal process, discounts for lack of marketability and control, historical and future financial statement assessments, among other factors.
Financial Reporting: accounting standards around the globe require companies to complete business valuation procedures for financial reporting purposes. For example, both IFRS 3 and US GAAP ASC 805 require companies that go through a transaction (i.e. merger, acquisition, divestiture, spin-off, etc) to report the fair market value of the assets and liabilities acquired. These are complex valuation tasks, which are often outsourced by companies. Therefore, valuation specialized companies can help companies comply with the accounting standards. Some examples of these engagements are business combinations, stock-based compensation, goodwill and intangible assets testing and impairment.
Litigation: business appraisers often get engaged in legal proceedings to place a value on a company’s interests. Litigation in relationship to companies’ business interests can occur due to several reasons such as divorce, minority interest legal actions, etcetera. Reports arising from litigation engagement result in an unbiased opinion of value, where the appraiser would need to holistically evaluate the business to estimate the fair market value of its shares. Many times, privately-held companies present intangible assets such as professional goodwill and software, that would not appear in the company’s accounting books and can potentially represent an important value to the company.
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