Divorce Engagements: Valuation Terms Defined
With the evolution of mediation requirements, divorcing parties and their advisors are discovering the importance of early involvement by a qualified valuation professional. Defining the engagement and understanding the requirements of the work product is crucial. Unfortunately, there may be a lack of understanding as to what a “valuation” is. In fact, depending on the circumstances of a given situation, there are different products and services that may fit the need. Report documentation, analytical procedures and assumptions, and fee structure can be greatly affected by the nature of the chosen product or service.
For the purpose of this article, we will focus on “calculations” and “full appraisals.” The terms “calculations” and “appraisal” have specific meaning at Mercer Capital because we subscribe to the American Society of Appraiser’s (ASA) Business Valuation Standards and the Uniform Standards of Professional Appraisal Practice (USPAP). Yet, what is the difference between “calculations” and “appraisals?” Let’s look at their definitions.
Calculations result in “an approximate indication of value based upon the performance of limited procedures agreed upon by the appraiser and the client.” Calculations can substantiate value but cannot be styled an “appraisal” under the ASA’s Business Valuation Standards. Because in many cases calculations do not typically require an on-site inspection, extensive industry and market research, or detailed documentation, they can save time and expense. However, calculations can be elevated to a full appraisal when formality and completeness is needed for the Court or in response to the scope of an opposing expert’s work. Mercer Capital has provided valuation calculations in numerous cases as the jointly retained appraiser where both sides were concerned only with the valuation analysis.
An appraisal is “an unambiguous opinion as to the value of a business, business ownership interest, or security, which is supported by all procedures that the appraiser deems to be relevant to the valuation.” An appraisal requires, among other things, an on-site visit with company management, extensive industry and economic research, collection and analysis of all information expected to be relevant to the valuation.
The valuation process involves defining the engagement, collecting and analyzing financial and business information, researching relevant valuation data, developing the valuation, and communicating the result via an agreed upon level of documentation and/or testimony. Our extensive resources allow divorce attorneys and their clients the advantages of a diversified valuation and advisory firm with a national reputation and competitive fee structure. Frequently our approach in defining the engagement with our clients helps uncover heretofore unrecognized issues and concerns.
If you have any questions about the services we provide, please do not hesitate to call us at 901.685.2120.
Reprinted from Mercer Capital’s BizVal.com – Vol. 13, No. 2, 2001.