Most business valuation professional standards recognize two types of engagements: calculations and valuations. But in most litigation contexts — particularly when the business valuation professional will testify as an expert witness — only a full valuation report will suffice.
Conclusion of value vs. calculation of value
Valuation professionals follow different standards, depending on the organizations with which they’re affiliated. Although these standards vary somewhat, they generally concur on the amount of research and analysis required to prepare a full valuation. In a calculation engagement, however, the standards allow an expert to rely on specific (limited) information, analytical procedures and techniques to arrive at a calculation of value.
So, the critical distinction between the two types of engagements is the extent to which the valuation professional exercises professional judgment. In a valuation, the expert considers all relevant information, procedures and methods, and then chooses the methods he or she deems appropriate to arrive at a conclusion of value.
But, in a calculation, the expert and client agree in advance on the scope, information, procedures and methods that can be used. For example, the parties might agree that the expert won’t visit the company’s facilities or interview management. Or they might decide that the expert will perform a discounted cash flow analysis but won’t research comparable transactions.
Therefore, a calculation engagement doesn’t result in a value conclusion — it results in a value calculation. And it’s common for calculation reports to qualify the expert’s findings by stating that the results might have been different had a full valuation been performed.
Purpose of the engagement
A calculation engagement can be a cost-effective planning tool for, say, early-stage litigation, expansion projects, out-of-court settlements or M&A negotiations. But a full valuation report is usually called for when it appears that a matter is headed for trial or a third party will rely on the valuation expert’s fair market value conclusion.
Courts traditionally give little weight to valuation testimony if the expert was engaged to perform only a calculation of value. But that doesn’t necessarily mean that such testimony is inadmissible.
For example, in Hipple v. SCIX, a federal district court permitted an expert to testify, even though he provided only a value calculation, not a value conclusion. In this Daubert challenge, the defendants questioned the opposing expert’s conclusions on reliability and relevance grounds. The court denied the motion, noting that:
- The expert was a CPA, and the American Institute of Certified Public Accountants (AICPA) approves of both calculations and conclusions of value,
- The expert explained that he couldn’t provide a value conclusion because he had only limited information about the defendants’ financial records, and
- The expert made his assumptions and methodology clear.
Under those circumstances, it was appropriate for the trial court to admit the expert’s opinion and determine the weight to give the expert’s testimony after cross-examination.
Even if a calculation of value is admissible, however, it’s unlikely to be given much weight. For example, in Surgem, LLC v. Seitz, the appellate court upheld the trial court’s rejection of an expert’s testimony based on a calculation of value. The expert testified that “more work should have been done” for him to develop a value conclusion and prepare a full valuation report.
Calculations offer limited value
Calculation engagements have their place. But, when you go to court, your expert generally needs a full valuation report. Even if a calculation is admissible, its limitations will likely diminish its probative value.