What it means
Business valuation is its own discipline, separate from audit and from general accounting. It combines financial analysis, economics, industry research and a body of professional standards covering how an opinion of value must be developed and reported.
The credential exists because the people relying on a valuation, including courts and tax authorities, need to know the preparer has been tested against those standards. The holder is usually a qualified accountant who has added a valuation examination, a required volume of valuation experience and specific continuing education.
The experience element matters most, because valuation judgement comes from having done the work and then defended it. Applicants document actual engagements rather than simply claiming years in practice.
The commercial need is constant. Shareholder buyouts, divorce settlements, estate and gift tax filings, employee share schemes, partnership disputes and the purchase price allocation after an acquisition all require a value that will survive challenge.
An unsupported number in any of those settings gets attacked, and the cost of the attack usually exceeds the cost of doing the valuation properly. The work itself applies three families of method: income approaches that discount expected future cash flows, market approaches that apply multiples from comparable transactions or quoted companies, and asset approaches that build value up from the balance sheet.
A trained valuer weighs the approaches, explains the weighting, and applies adjustments for lack of control or lack of marketability. The report sets out every input, which is what makes the conclusion defensible.
A business owner should know when a formal valuation opinion is needed and when a quick estimate will do. A back of envelope multiple is fine for a board discussion about direction, but a tax filing, a court case or the buyout of a minority shareholder needs a full report from someone who can be cross examined on it.
Asking which professional standard the report is prepared under is the quickest way to tell which one you have been given.
In practice
Real-world examples.
Example
Two founders of an engineering firm fall out and one wants to be bought out of a 40% holding. A valuation report supports $3,200,000 for the stake, including a discount for lack of control. The shareholders agreement names a single accredited valuer, which keeps the dispute out of court.
Example
A family business transfers shares to the next generation and needs a value for a gift tax filing. The report documents the methods applied, the comparable transactions used and the discounts taken. When the filing is reviewed, the documentation answers the questions without a formal challenge.
Example
An acquirer paying $18,000,000 for a software business must allocate the price across identified assets and goodwill. A valuation specialist values the customer relationships at $4,500,000 and the technology at $3,000,000, leaving goodwill as the balance after net tangible assets. The allocation drives the amortisation charge in the acquirer's accounts for years afterwards.
Formula
Calculation
Valuation has many formulas, and the capitalisation of earnings method is one of the clearest:
Value of Business = Normalised Annual Earnings / Capitalisation Rate
Capitalisation Rate = Required Rate of Return - Expected Long Term Growth Rate
Take a profitable plumbing contractor. Reported profit before tax is $900,000, but it includes an owner's salary of $400,000 against a market rate of $200,000 for the same role, and a one off legal settlement cost of $100,000. Normalised earnings are $900,000 + $200,000 + $100,000 = $1,200,000.
The valuer assesses a required return of 22% for a business of this size and risk and expected long term growth of 2%, giving a capitalisation rate of 22% - 2% = 20%. The value of the whole business on this method is $1,200,000 / 20% = $6,000,000.
A 15% stake is now being bought out. A straight 15% of $6,000,000 is $900,000, but the valuer applies a combined 25% discount for lack of control and lack of marketability, giving $900,000 x 75% = $675,000 as the value of the minority stake.Case study
Seen in the real world.
Kestrel Doors is an illustrative, fictional manufacturer used to show why a defensible valuation pays for itself. Kestrel had four shareholders, and when one of them died his estate needed a value for a 25% holding. The surviving shareholders offered $1,200,000, based on a multiple one of them had read in a trade magazine.
The estate commissioned a full valuation from an accredited specialist. Normalised earnings were $1,600,000 after adding back an above market director salary and removing a one off insurance recovery, a capitalisation rate of 20% gave a whole business value of $8,000,000, and a 25% stake came to $2,000,000 before a 20% discount for lack of control and marketability, or $1,600,000. The gap between the two numbers was $400,000.
The parties settled at $1,550,000 within six weeks, the estate paid its tax on a documented basis, and no litigation followed. The illustrative moral is that the argument was never really about valuation theory; it was about whether anybody had written the reasoning down.
Watch out
Common mistakes.
- Using a single industry rule of thumb multiple as a valuation. A multiple is a sanity check rather than an opinion of value, and it ignores the earnings quality and risk of the specific business.
- Valuing a minority stake as a simple fraction of the whole. Lack of control and lack of marketability normally reduce the value of a small holding, sometimes substantially.
- Commissioning a valuation only after a dispute or a deal has started. The cheapest time to agree a valuation basis is while everyone still gets on, usually in the shareholders agreement.
Questions
People also ask.
What is the difference between a valuation and a fairness opinion?
A valuation concludes on a value, while a fairness opinion concludes only on whether a specific proposed price is fair to a particular party.
Why do normalising adjustments matter so much?
Reported profit often includes owner salaries above or below market rate and one off items, so valuing the business on the unadjusted figure can move the answer by millions.
Does an audit qualification make someone a business valuer?
No, audit and valuation are different disciplines with different professional standards, which is exactly why a separate valuation credential exists.
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