What Factors Determine the Need for a Certified Valuation vs. an Estimate of Value?

A Certified Valuation and an Estimate of Value are two different methods of determining the value of a business, asset, or property. The factors that will require a Certified Valuation vs. an Estimate of Value will depend on the purpose of the valuation and the level of accuracy and detail required.

When to Use Estimate of Value

An Estimate of Value may be appropriate for less complex and informal situations such as:

  1. Financial Planning: If you and your wealth advisor are trying to determine the value of your personal assets for financial planning purposes, an Estimate of Value may be sufficient.
  2. Internal Business Planning: If you are a business owner and need a rough idea of the value of your business for internal purposes, such as budgeting or strategic planning, an Estimate of Value may be sufficient.
  3. Marketing: If you are considering selling your business, an Estimate of Value may be appropriate to provide a general idea of the business’s potential value to buyers.

Estimates of value are typically calculated using a single valuation methodology. Typical estimate of value methodologies include a ‘Market’ or ‘Income’ (Discounted Cash Flow) approach.

Software solutions are often used to determine Estimates of Value because of their ease of use and low cost.

Quist Insights – Spotlight & Quist Insights – Advanced use both valuation methods when calculating valuations.

When to Use Certified Valuation

Here are some key factors that may require the use of a Certified Valuation:

  1. Regulatory Requirements: If a business or asset is subject to regulatory requirements, such as compliance with accounting or tax regulations, a Certified Valuation may be necessary to ensure that the valuation is done correctly and meets the required standards.
  2. Legal Disputes: In the case of legal disputes such as litigation, bankruptcy, or divorce, a Certified Valuation may be required to provide an accurate and defensible value of the asset or business in question.
  3. Transactions: When buying or selling a business, a Certified Valuation may be required to provide an accurate value of the business for negotiation purposes and to ensure that both parties agree on a fair price.
  4. Public Reporting: If a company is publicly traded, a Certified Valuation may be required for financial reporting purposes to provide an accurate valuation of the company’s assets and liabilities.

Depending on the specific circumstances and purpose of the valuation, Certified Valuations typically utilize multiple methodologies to generate the valuation. Key determinants of the appropriate methodologies are the need to arrive at an accurate and defensible valuation.

Common Valuation Methodologies

Depending on the nature of the asset or business being valued and the purpose of the valuation, common valuation methodologies used for a Certified Valuation include:

  1. Income Approach: This approach is based on the present value of the future income generated by the asset or business. It is commonly used for valuing businesses and involves forecasting future earnings and applying a discount rate to determine the present value of those earnings.
  2. Market Approach: This approach compares the asset or business being valued to similar assets or businesses that are either publicly-traded or have been sold in the market recently.
  3. Asset Approach: This approach is based on the value of the assets of the business, in relation to any liabilities. It is commonly used for valuing companies with significant tangible assets, such as real estate or manufacturing equipment.
  4. Cost Approach: This approach estimates the cost of replacing the asset or business, considering the cost of materials, labor, and other factors. It is often used for valuing assets that are unique or difficult to compare to similar assets.
  5. Combination of Approaches: Valuation experts often use a combination of approaches to arrive at a more accurate valuation. For example, they may use the Income Approach and Market Approach to value a business, or the Cost Approach and Income Approach to value intellectual property.

It’s important to note that the choice of valuation methodology will depend on the specific circumstances and purpose of the valuation. A Certified Valuation expert will evaluate the asset or business being valued and select the most appropriate methodology or combination of methodologies to arrive at an accurate and defensible valuation.

Ultimately, the decision to obtain a Certified Valuation or an Estimate of Value will depend on the specific circumstances and purpose of the valuation. It is important to consult with a professional valuation expert to determine the appropriate valuation method.

Ken Bero

Ken Bero, Sale Director joined Quist in January 2019 with the purpose of building and promoting Quist’s valuation software solutions, Quist Insights, across various partner channels. Mr. Bero is heavily involved with the Exit Planning Institute, bringing awareness to advisors on how to build out their exit planning models and incorporate business valuation techniques across the owner’s journey. Mr. Bero brings extensive experience in leading high growth companies, has served in multiple senior management capacities as well as front line sales efforts. Mr. Bero received his Bachelor’s degree in Government from Bates College and his MBA degree in Finance from Northeastern University.

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