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What does a valuator do?

In a typical engagement, a valuator must form an opinion of value based on the appropriate standard and for the specific purpose of the assignment.

"In order for a valuator to do a good job, he or she really needs to gain an understanding of the business and the industry," according to Ralph Stephens, director of tax and business valuation at the Leading Edge accounting firm of Postlethwaite & Netterville in Baton Rouge, La. This involves an analysis of the business, its financial condition, future prospects, the industry and the economic climate in which it operates.

Based on this information, the valuator will then choose one or more methods to generate an indication of the value of the business.

There are three general approaches to business valuation and several methods under each of these approaches. "Most valuators mix these approaches and will use many different methods under these approaches," says Charkatz.

The three most common valuation approaches are:

• Income Approach—value based on expected future benefit to the owner(s) and the risk associated with obtaining that benefit. The future benefit is usually measured in terms of cash flow, net income or revenue. The risk is usually determined using the Capital Asset Pricing Model (CAPM) or the build-up method. (See sidebar).
• Asset Approach—a summation of the fair market value of the net assets of a business (usually used for real estate or marketable security investment companies).
• Market Approach—value based on comparisons to transactions in companies similar to the subject company.

Once the analyst determines the value of the business under one or more of the above methods, he or she may adjust that value for lack of voting control over the company or lack of a ready market for the company's securities.

"As with most things, the complexity of the valuation drives how much time it takes," says Stephens. "There are so many different types of businesses. A comprehensive valuation may take weeks and cost $7,500 or more. Often we are asked to do something less than a comprehensive report, which is allowable under professional standards. These reports are typically less expensive and less time consuming."

For example, you may be interested in buying a business and may have done your own due diligence. "But you may ask a valuator to kick the tires and run some numbers based on the assumptions you've given him or her. You're not asking for market analysis or to evaluate the competition. Our goal in that case is to provide as much service to achieve those goals," says Stephens.

What do you get in the end?

The final product depends on the nature of the valuation and the agreed-upon scope of the engagement. For a complete valuation, the end product is typically a written report that details what was done, what assumptions and limiting conditions were present, what methods were used and why and, ultimately, an opinion as to what the business interest being valued is worth.

"The report is fairly comprehensive. It follows the Uniform Standards of Professional Appraisal Practice (USPAP), which means it must contain enough information that the reader can come to the same conclusion as the valuator," says Stephens.

He cautions that business valuations are often performed for specific circumstances and often the value cannot be applied across the board. "If your spouse dies and you have a valuation done for estate tax purposes, that's one value to satisfy the IRS. But if you're thinking of selling the business now that your spouse has died, you may be able to sell it for a lot more. The original valuation was determined for a hypothetical buyer. If you have a specific buyer, say a competitor, the business may be worth a lot more," he says.

Finally, the information contained in the report can also provide valuable information for the daily operations of your business. It can point out strengths and weaknesses and also display those aspects of a business that are key to driving its worth.

Stephens and Charkatz recommend that you discuss any need for a business valuation with your CPA or other business adviser. If your CPA firm doesn't have a business valuator, they will be able to refer you to someone who can help. e