When we are asked to value a business, our first few questions usually revolve around the purpose of the valuation and what type of valuation a client requires.
Depending on the circumstances, there are different types of valuations and some activities that some may call valuations are not actually valuations at all. As the veracity, reporting and costs of these different types of engagements may vary, it is imperative that the instructions are clear on the type and any limitation of the valuation.
Professional business valuers, such as Chartered Accountant Business Valuation Specialists, are obliged to comply with certain professional standards including any with APES 225 Valuation Services issued by Accounting Professional & Ethical Standards Board.
The types of valuations are: a Valuation, Limited Scope Valuation, or Calculation Engagement. APES 225 Valuation Services provides definitions of the different types of valuation engagements and gives examples of different types of valuation.
Calculation Engagement is a valuation engagement where the client determine the Valuation Approaches, Valuation Methods and Valuation Procedures that the valuer will employ. A Calculation Engagement generally does not include all of the Valuation Procedures required for a Valuation Engagement or a Limited Scope Valuation Engagement. An example may be the calculation of a share price based on a prescribed formula.
Limited Scope Valuation Engagement is a valuation engagement where the scope of work is limited or restricted. A limitation or restriction may be imposed by the Client or Employer or it may arise from other sources or circumstances. An example may be an internal indicative valuation where the industry is not analysed.
Valuation means the act or process of determining an estimate of value of a business, business ownership interest, security or intangible asset by applying Valuation Approaches, Valuation Methods and Valuation Procedures. This is the most comprehensive type of valuation which may be used for litigation purposes (such as family law and shareholder disputes, purchase price allocations and independent experts report on a takeover.
Another common so called “valuation” is for an estimate of a sale price of a business. As part of the business sale process, we may be asked to provide generic valuation statistics and parameters relevant to the industry in which the business operates. This is not a valuation, even if some valuation procedures are conducted as the engagement is to provide ancillary services related to the sale.
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