Without further ado ... Top 10 business valuation errors.

• Author: Hamilton, Chris
• Position: Businessvaluation

CPAs often advise clients regarding the value of their businesses, whether they perform the valuation themselves or help clients find and hire a qualified appraiser. In either case, the client and appraiser rely on the CPA for financial information, projections and analysis.

In addition to being cited frequently in legislation, valuation reports are required for filing estate and gift tax returns, ESOP annual reports, financial planning, estate planning, succession planning, FAS 141 and 142 compliance, and transfer pricing as well as in anticipation of a merger/acquisition.

Valuation reports contain highly technical language that can make them difficult to understand by those who are not properly trained. This can mask serious deficiencies in a report that may render its conclusions irrelevant--or wrong.

Following are common valuation errors for which CAPs can be on the lookout:

1. Math Errors

   Even the most sophisticated reports can contain calculation errors. In a business appraisal, one error early in the process can have a dramatic impact on the conclusion of value. Verifying each calculation is a must.

2. Tax Issues

   An example of the most common error is that the proper application of taxes is not considered.

   There are several other controversial tax issues depending on the form of business being valued. The two most significant are the consideration of built-in gains and tax affecting S corp. earnings. Review how these issues were addressed and whether the assumptions, calculations and conclusions are accurate.

3. Incorrect Standard of Value

   There are three generally accepted standards of value: synergistic/investment value, fair market value and fair value.

   Strategic business acquisitions often are done at synergistic/investment value, and fair market value and fair value are theoretical values as defined by tax regulations and statutory definition. The purpose of the business appraisal will determine the standard of value to be used and the standard of value will define the value conclusion.

   Take, for example, a stockholder dispute that requires a valuation report as a part of the litigation process. The standard of value in most state courts is fair value [Fair Market Value is a theoretical value that is most often used for tax (estate and gift) purposes]. If the appraiser reports the value on a fair market value standard, the report is irrelevant and will be rejected. Appraisal reports prepared for compliance with estate and gift tax...