The difference between a Certified Valuation and an Estimate of Value may seem like semantics, but it will save you money as a business owner.
An Estimate of Value comes into play in scenarios that require a less formal but more frequent analysis of your business. Here's where it fits best:
Internal Business Planning: You can't build the value of your business if you don't know your starting point. Moreover, you can't gauge progress without subsequent estimates. You and your executive team should be revisiting the Estimate of Value of your business on a consistent basis when engaging in strategic planning.
Financial Planning: The line between personal financial planning and business planning is thin to non-existent for business owners. When working with your advisor to plan for future income needs, charitable planning, and legacy goals, having an accurate Estimate of Value is critical.
Preparedness: You may not be planning to sell your business, but having a working number for what might bring you to the table if you get an unsolicited offer can save you a lot of time and hassle.
Certified Valuations can be significantly more expensive than their Estimate of Value counterparts, but may be required in the following cases:
Legal and Tax Situations: Everything from litigation and divorce to ESOPs and the gifting of shares will require an IRS compliant, Certified Valuation.
Regulatory Requirements: When complying with accounting or tax regulators, a Certified Valuation may be needed to ensure you're meeting the proper standards.
Transactions: A Certified Valuation can provide a precise value in the context of M&A, divestitures, etc.
The decision between the two hinges on your specific requirements, and chances are you will have a need for both at different points in your journey as an owner. In general, Certified Valuations should be used sparingly, and Estimates of Value should be leveraged on a consistent basis.
If you approach your trusted advisor (a CPA, Attorney, etc.) and tell them you're thinking about expanding a business unit, acquiring a competitor, or shopping for a buyer, they may recommend you "get an appraisal." If you don't understand the difference between the two methodologies, you could be flushing thousands, potentially even tens of thousands of dollars down the drain by paying for a Certified Valuation when all you need is an Estimate of Value.
*Both an Estimate of Value and a Certified Valuation are only as good as the professional on the other end. Make sure you are working with a quality firm/individual!
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