I am often asked whether a calculation of value engagement would suffice in place of a full valuation engagement. The answer is that it depends on the how the valuation will be used. A valuation engagement provides an opinion or conclusion of value by the analyst. It incorporates all methods that will produce credible amounts. The report can be done in either a detailed (which can run to 50 pages even for a small company) or summary format. A full valuation is best when the report will be used for IRS compliance (estate and gift tax returns), financial reporting, litigation that might require court testimony and some types of corporate planning. A calculation engagement provides a calculated value which involves a limited scope of work. The analyst and client agree on the methods to be applied and the resulting report does not include all the procedures required for an opinion of value. A calculation can be used for internal company planning, for preliminary use for a mediation or litigation and for buy-sell agreements when the agreement specifies the use of a formula.
Obviously a calculation of value will be less costly than an opinion of value and can be an effective way to start transition or succession planning or initial negotiations in a divorce action. The work performed for a calculation engagement can be a starting point for an upgrade to an opinion of value if needed. However, if it is likely that the valuation report will be needed for trial, it is best to start with an opinion of value.