Many small and medium business owners feel like they’ve made a great leap in personal and professional development when partnering with Sofer Advisors for their business valuation. This feeling is completely reasonable—calculating valuation can be a daunting concept. It’s especially tricky for those approaching it for the first time as well as busy entrepreneurs pouring all of their energy into successfully running their startup business.
As a result, it’s completely understandable to be thrown for a loop by the question a qualified valuation expert tends to ask next: “Are you interested in a business valuation report based on a formal or informal valuation?”
It’s All About the Valuation Calculation
Incredulous business owners might respond saying, “Isn’t a business valuation a business valuation?” Not exactly. The fact is there are two types of business valuations possessing significant differences. In this article I will demystify both choices. This will empower you to make the correct decision as to which type you should pursue.
For many business owners, both formal and informal valuations can play an important role at some point. So, how do you decide on a formal or informal valuation? It’s all a matter of what you want to accomplish through the valuation and the difference between value and worth. Knowing the two options and their applications, your choice will become clearer.
How Do You Calculate Valuation?
Informal valuations, often referred to as uncertified valuations, have a technical name in the financial industry—“Calculation of Value.” Likewise, formal valuations, commonly called certified valuations, have their own technical name—“Conclusion of Value” or “Opinion of Value.” Let’s explore each with the emphasis on how they can help you manage your business.
Calculation of Value
A quicker business valuation report is an excellent choice if your reason for needing a valuation aligns with the parameters of an informal valuation.
The Calculation of Value fits well with its common name of informal valuation, but it still packs a punch. In a calculation of value, the Sofer Advisors team works with clients to determine the best valuation methodology to apply, then completes the work using streamlined reporting processes. The result? A faster business valuation report that also costs considerably less than a formal valuation. This is a fantastic option if your motivation for seeking a valuation fits within the constraints of an informal valuation.
Those constraints are mostly related to how the valuation will be used. An informal valuation won’t typically stand up in court. This means Sofer Advisors can only provide limited testimony on your behalf based on a calculation of value. Also, when dealing with the IRS, a formal valuation is required. Informal valuations do have limited applications in divorce or other legal proceedings at the settlement stage. More, a calculation of value can be sufficient to reach settlement if the divorce is amicable.
So, what are the best uses of an informal valuation? It’s ideal for assisting in strategic planning. Many companies engage Sofer Advisors in an annual calculation of value to assist in planning and the measurement of their strategic initiatives. If there isn’t an imminent sale or specific buyer, a calculation of value report gives you the highest dollar return on investment versus the opinion of value report. This can always be paired with a tactical but more infrequent formal or certified valuations to create a living, breathing picture of your organization’s value and growth.
Conclusion of Value
The conclusion of value, or formal valuation, is a more rigorous process than its informal counterpart. It requires multiple valuation methodologies for consideration. It’s also more expensive and time-consuming than an informal valuation. Yet for all of these challenges, there are many situations in which a formal valuation is worth its weight in gold—if not more.
Again, formal valuations are necessary when dealing with the IRS in matters of gift or estate taxes. The Sofer Advisors team is very experienced in dealing with the federal government which tends to be wary of calculation of value reports. You have only one chance to get things right when dealing with the IRS. Therefore, the interests of your company, your family, and your legacy are best served by having an iron-clad formal valuation from Sofer Advisors.
Additionally, we provide our clients tremendous peace of mind when a company’s value plays into ongoing litigation. We often complete formal valuations at the behest of clients embroiled in personal or professional divorces. Whether you’re going to court with a soon-to-be ex-spouse, or a partner you’ve had a falling out with, a formal valuation provides needed ammunition to prevail in court. Formal valuation is also necessary when disputing with the government over the value of your lost business through eminent domain. Also, based on our formal valuation work, our team is ready and willing to testify to our findings as an expert witness, a service giving you an unbeatable edge.
To discuss just which type of valuation is right for you and your business, contact Sofer Advisors today for your free consultation. Together, we’ll find the path towards your continued success.
David Hern is the founder and chief executive officer of Sofer Advisors, LLC focusing on business advisory services related to litigation assistance, estate and tax planning, and business enterprise valuations for various privately-held and public companies. He is a qualified financial analyst with a proven ability to simply and clearly communicate analysis to boards of directors, presidents and CEOs, CFOs, controllers and private equity portfolio managers. David has been recognized for enabling organizations to determine their enterprise and equity value for a variety of situations including strategic planning, sale or IPO, mergers and acquisitions, financial reporting (common stock, stock options grants, purchase price allocations, impairment analyses, etc.) and tax compliance (estate & gift, 409A, NUBIG). Industry experience includes, but is not limited to, professional services, business service, healthcare, information technology, financial services, and manufacturing & distribution.
