The Defining Elements of a Valuation Engagement
They Are More Important Than You Think
In the valuation world, literary success and technical competency are often estranged. However, when the two do meet in the same document, the valuation report is readable, understandable, the analytics are replicable, and the reader recognizes the subject company or interest.
It all begins with understanding and explaining the defining elements of the valuation engagement correctly, which is a step in the valuation process that cannot be overlooked or given cursory treatment. If the business appraiser gets this wrong or fails to properly explain the elements in his or her report, you might receive a work product that doesn’t satisfy your intended purpose.
Business valuation is defined as “the act or process of determining the value of a business enterprise or ownership interest therein” (ASA Business Valuation Standards). Business valuations can be among the most hard to understand documents for readers. Sadly, few valuations provide the reader with a clear, concise definition of what the report proposes to do and what its conclusions represent. What are the parameters of the report? Who is the client? Why does the report exist? What definition of value is used in developing the report conclusion? The answers to these and other important questions can have incalculable influence on virtually every aspect of the development and documentation of a business valuation report.
Providing the valuation report reader a well-defined set of report parameters (defining elements) starts with defining the valuation engagement–done by the client and the valuation practitioner. The f irst call to the valuation professional often originates from an attorney, accountant, company financial officer or other trusted advisor. Although business owners are increasingly aware of the valuation professional’s role, most private entity owners have rarely experienced the valuation engagement process.
It is incumbent upon the valuation professional to work with the client or referral source to clearly understand and record these defining elements. A valuation professional that does not invest the time necessary at the beginning of an engagement to understand the defining elements of that engagement can put the engagement at risk.
The Defining Elements of a Business Valuation Engagement
The defining elements of a business valuation assignment and the resulting work product include the following primary definitions, concepts, and terms. These defining elements should foreshadow the content and organization of the valuation report.