The CPA’s Role in Business Valuations

By Melissa Soranno, CPA, WithumSmith+Brown, PC – May 4, 2016
The CPA’s Role in Business Valuations

A CPA’s role in business and finance can stretch far beyond the scope of accounting, audit and taxation services. CPAs can be valuation specialists and are sought-after trusted advisors in many areas.

To determine the economic value of a business interest while performing a valuation, you can use various approaches and methodologies. Shareholder disputes, tax planning purposes, divorce proceedings, or consulting for a client who is interested in purchasing or selling a business are a few examples that require business valuations. Valuation specialists can find roles in both large public accounting firms that offer a variety other services and small companies that specialize in valuation services.

My Experience With Business Valuations

I have an accounting degree with a minor in economics. My economics background allowed me to understand and analyze the data used to determine the reasonableness of a value being derived. My journey into business valuations started out in traditional accounting. It allowed me to understand underlying concepts needed to perform a business valuation. My passion for performing business valuations stems from being able to incorporate different aspects of accounting and business. In any given valuation engagement, there is a tax component, an audit and accounting component, and an economic and industry research component. In addition, I have the ability to meet with attorneys and interview business owners to learn about the operations of a variety of companies and industries.

How to Specialize and Succeed in Business Valuations

If considering a business valuation career path, it is beneficial to obtain an understanding of the fundamentals of tax and accounting whether it is from college classes or on the job experience.

To specialize in business valuation, you need to build on your skills and knowledge in traditional tax and audit. Before I became involved in business valuations, I spent four years in the “traditional accounting” arena in a public accounting firm. I learned how to prepare tax returns and analyzed financial and non-financial documents for various entities.

The first step in a business valuation is to analyze financial and non-financial information to understand the operations of the business subject. This information may include tax returns, general ledgers, banking records, shareholder/partnership agreements and contracts. Possessing a sound background in analyzing this documentation provides a foundation for understanding the substance behind the professional judgment and reasonableness used to determine the value that is deemed appropriate.

Upon reviewing financial information, you may need a CPA to interview management or the business owners. Use the interview to obtain additional information about the business being valued. That includes its:

  • Industry
  • Competitors
  • Management and/or owner roles and responsibilities
  • Officer perquisites
  • Historical trends
  • Future outlook of the business

When I would field audits, I learned the techniques of interviewing clients and was able to use those techniques while performing business valuations. Ask comprehensive and relevant questions during an interview with management. You can use the answers to determine if certain areas require more details or need to be reviewed more thoroughly when valuing a business.

After obtaining a thorough understanding of the business being valued, perform industry, economy and market research surrounding the environment in which the company operates. CPAs use various online and print publications and databases to identify data on comparable businesses, trends in the industry and the global, national and local economic conditions.

Business valuations not only include data analysis and research but there is also a writing component. The scope of engagement determines how a CPA conveys the value. If the engagement is for internal discussion or settlement purposes, a CPA could prepare schedules with the value and deliver the results to the parties in a face-to-face meeting. In other instances, the engagement may require that a CPA prepare a full valuation report that includes:

  • Detailed facts
  • Assumptions and analyses utilized to estimate the value
  • Conformity
  • Reference to applicable standards for valuation services
  • Applicable revenue ruling
  • Statutory requirements

In certain situations, a CPA can be called upon as an expert in a court hearing or trial to discuss findings and opinions regarding the valuation estimate. If called upon to provide such services, a CPA typically works alongside attorneys to prepare for the trial or court hearing. A CPA could also be engaged to critique the calculation or report of another valuation appraiser. And present their opinion on the reasonableness and assumptions the appraiser used to estimate a business value.

Melissa S. Kramer

Melissa S. Kramer

Melissa Soranno, CPA, is a manager at WithumSmith+Brown specializing in forensic and valuation services. She's a member of the NJCPA Young CPA Council and was named one of the NJCPA’s “30 Under 30.”