Benefits of following SSVS No. 1 for business valuations
Most professional services providers understand that “standards” are a way of doing things — the norm, or what is approved by some authority. Thus, the AICPA’s Statement on Standards for Valuations Services No. 1, known as SSVS No. 1, outlines how the AICPA expects its members to provide valuations. But aside from the parental-sounding “Because I told you to,” what are the benefits of following the AICPA’s SSVS No. 1 for the valuation off businesses, ownership interests, securities or intangible assets?
The first benefit is that the statement, in the same way standards in other occupational areas do, can provide professional guidance to help valuation providers ensure they are performing valuation services consistently with peers. SSVS No. 1 was developed by the AICPA to offer direction on best practices related to valuations. For example, SSVS No. 1 outlines three approaches to a valuation that a CPA should consider when valuing a business, ownership interest or security: the income, market and asset approaches. Similarly, it outlines approaches that should be considered when valuing intangible assets and describes various adjustments (such as a discount for lack of marketability) that should be made.
“These standards are helpful because they force you to dive deeper to justify a valuation,” said Mark Crowder, director of customer success for the Sageworks Valuation Solution. “For example, if an owner had a heating and air conditioning company with $4 million in sales and 10 percent projected growth over a certain period, we could put together a value that may be reasonable based on those projections. But if we used the market approach, we might see other HVAC companies’ metrics and realize that the value of those companies don’t come anywhere near what we say our client’s HVAC is valued, so it raises a red flag. It gives you a more objective view of the business.”
Related to the benefit of consistency, a second benefit of following accepted standards for valuations is that it promotes transparency and good communication about the service. One of the pushes behind SSVS No. 1 was concern by regulators that some valuations had inadequate disclosure of the process, making it difficult for others to understand or replicate the results. SSVS No. 1 provides guidance on appropriate content of reports and “a common vocabulary,” as the AICPA says in its fact sheet on SSVS No. 1. Clients and other users know what to expect in terms of documentation.
“If your business client has to go to court, the client will likely need a different type of report than a business owner in the early stages of planning for retirement,” Crowder said. “You want to provide your client with a deliverable that is well thought out and backed up appropriately. That also adds to your credibility as a professional.”
Efficiency is often another benefit of applying standards to processes used for each engagement, especially if technology is leveraged. For example, Crowder said, getting financials from a client in a format that allows the valuation professional to begin performing calculations and adjustments can be time-consuming, but an automated formatting system can prepare the financials quickly and consistently.
Similarly, finding companies that can be compared to the subject client for incorporating the market approach could be extremely time-consuming without a database of similar companies available to you.
Some solutions allow the valuation professional to construct the pieces of the final report while conducting the analysis– populating charts and graphs and written components of the report so that by the end of the analysis, much of the report is custom pre-written for the specific engagement. This can cut hours from a manual process that involves first performing calculations, then writing up the analysis, then editing charts and graphs, then proofreading for errors that can be byproducts of old report templates.
“Technology allows you to focus on what attracted you to business valuation, not the mundane tasks, such as formatting a Word document or manually typing in financials for hours and hours,” Crowder said.
Additionally, he said, “the right technology makes it easier to follow professional standards and gives you the ability to focus on all the judgements that generate the conclusion of value, hopefully giving your clients better service and giving your firm strong, profitable client relationships.”
Practice Aid: Common Errors When Interpreting FASB Private Company Guidance for Intangible Assets
Checklist: Business Valuation Document Checklist
Sageworks Valuation Solution
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Image credit: Modified from “Simplicity,” by Jase Curtis via Flickr CC
