December 8, 2023

Valuation Strategy: Making Cost-Effective Choices for Legal Proceedings

By Gregory Kohr, Partner, Advisory Services & Danielle Bellomo, Director, Advisory Services

Valuation

Are you an accountant whom an attorney has retained, and they have requested that you provide a valuation report? Or an attorney who has recently retained a valuation expert and asked them to prepare a valuation report? At first glance, it may seem like a simple request, but it’s not that straightforward.

In our experience, often when the request is made in the context of matrimonial litigation or a potential buy/sell matter, the requested “report” may really be valuation schedules that could be used for settlement/mediation purposes or to get a sense of a business’s value. The difference in the end product is not only the number of pages but, more importantly, the cost. A trial-ready valuation report will likely cost tens of thousands more than preparing valuation schedules. So, what is the best way to determine what work product is necessary to assist the client best? Let’s briefly review the different options:

1. Valuation Schedules Only

This could be an ideal option when the parties have limited resources or prefer a more informal process, whether it’s litigation or a buy/sell. This is a particularly good option when the parties are trying to settle the case/are attending mediation. A valuation analyst should still perform all the necessary procedures as detailed in the Statement on Standards for Valuation Services (“SSVS”) by the American Institute of Certified Public Accountants¹ (AICPA). Another advantage of initially preparing only schedules is that they can be converted into a formal valuation report, if necessary, as generally, schedules alone are not an acceptable expert report for trial or arbitration testimony purposes.

2. Calculation Engagement

Governed by SSVS, a Calculation Engagement does not require as many procedures as a valuation engagement, which we will discuss later. The results are expressed as a “calculated” value. In this scenario, the valuation analyst, and the client agree on the approaches and methods that will be utilized as well as the extent of the procedures the valuation analyst will perform. The calculated value can be expressed as a range or a single amount. Typically, a report will be issued indicating that it is a “Calculation Engagement.” While it is possible to submit a Calculation Report for purposes of trial or arbitration, generally, valuation analysts prefer to issue valuation engagement reports if there is the possibility they will get called to testify.

3. Valuation Engagement

Valuation Engagement are also covered under SSVS. However, unlike a Calculation Engagement, the valuation analyst is required to perform more procedures in a Valuation Engagement. A Valuation Engagement is most appropriate when the valuation analyst is free to apply the valuation approaches and methods they deem appropriate based on the specific circumstances of an engagement. The valuation results are expressed as a “Conclusion of Value.” Further, there are two types of reports in which a Valuation Engagement can be presented. One is the “Detailed Report,” which should include several sections including, but not limited to, detailed discussions regarding the analysis of the subject entity, valuation approaches and methods considered and used, valuation adjustments, and reconciliation of estimates and conclusions of value. A Summary Report is structured to provide an abridged version of the information included in a Detailed Report and, therefore, need not contain the same level of detail as a Detailed Report. However, there are still minimum requirements that are outlined within SSVS.

Next time the subject of preparing a valuation report is brought up, you will better understand the different options to discuss with the client to determine the appropriate work product given the specific situation. Often, litigation matters can spiral out of control quickly and become very costly. Careful consideration of what “report” is necessary for your client will demonstrate a high level of professionalism as well as respect for your client’s resources.