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Business valuation services are one of the areas of interest for CPAs as they broaden their offerings to include financial and other advisory services. Many accounting firms are expanding their business offerings to include valuation services. A company CPA may wish to consider opening a valuation practice for a number of good reasons, including the possibility for higher earnings and compensation.

In this article, we’ll give you an overview of valuation services for financial reporting, tax compliance, and litigation. Building a solid and long-lasting valuation practice requires understanding the areas in which certain valuation services enhance a company’s capabilities.


For many businesses, navigating the intricate financial reporting process is difficult. Companies in the United States compile financial statements in line with GAAP, which frequently necessitates the requirement for financial reporting-related appraisals. GAAP declarations typically specify the standards to be applied, the date, and the types of assets and liabilities that need to be evaluated. The only current source of GAAP is the Accounting Standards Codification (ASC), which is maintained by FASB. Here are a few of the most typical valuation projects carried out for financial reporting needs.

Fair Value Measurement

Enhancing disclosures and establishing a methodology for evaluating fair value on a consistent and comparable basis are two goals of ASC Topic 820, “Fair Value Measurement.” All companies, transactions, and instruments that call for fair value measurement must adhere to the broad, principles-based Topic 820 standard. Except for those involving stock compensation and other share-based payment transactions, it applies to all financial and non-financial assets and liabilities that are valued at fair market value. The price that would be paid to transfer a liability or received to sell an asset in an orderly transaction between market participants at the measurement date is referred to as fair value. Fair value and fair market value differ primarily in that fair value does not account for discounts for lack of control or lack of marketability.

Investment holdings are an example of an asset that is frequently represented at fair value on a company’s balance sheet. These assets and liabilities are classified based on the degree of judgment required to determine their fair values. The three-tier hierarchy of inputs required to calculate fair value measurements is established under Topic 820 as follows:

Level 1: Unadjusted quoted prices for identical assets or liabilities in live marketplaces.

Level 2: Inputs consist of observable, unadjusted quoted prices for comparable assets or liabilities in active marketplaces.

Level 3: Unobservable inputs

A business that owns interests in marketable securities, such as publicly traded stock, would categorize those assets as Level 1 assets and calculate the fair value of its holdings using quoted share prices from the market. The investments made by a private equity fund in privately owned companies would be categorized as Level 3 investments and valued for reporting purposes using techniques like discounted cash flows or guideline company transactions. The notes to the financial statements include the fair value hierarchy.

Equity-Based Compensation

For guidance on how to account for transactions when an entity trades its equity for goods or services, see ASC Topic 718, “Compensation—Stock Compensation,” and ASC 505-50. Corporations that offer equity-based remuneration to their employees are required by Topic 718, which applies to both public and private companies, to disclose the fair value of those awards in their financial statements. All stock options, restricted stock, stock appreciation rights, and other equity instruments used to reward staff members for their work must comply with this. Entities would typically apply the same guidelines to both employee and nonemployee equity-based awards following the adoption of ASU 2018-07, which revised Topic 718 to accommodate nonemployees. ASC 505-50 addressed equity-based payments to non-employees.

The expense for equity-based compensation provided to workers is calculated under Topic 718 using the “fair value-based method” of the award on the date of issuance, less any consideration that the employee may have paid. Employee stock options have characteristics that are different from those of publicly traded options because they are typically not marketable in the public markets. Companies should employ an option pricing model to assess stock awards when using the fair value technique, according to Topic 718. The Black-Scholes, binomial, and Monte Carlo models are frequently used by valuation advisers to calculate the fair value of employee stock options.

The definition of fair value under Topic 718 and the definition of fair value measurement under Topic 820 differ slightly in some circumstances. Although the fair value concepts in the two codifications are very similar, FASB chose to completely omit Topic 718 pronouncements from Topic 820 for practical reasons.

Due to the frequent existence of various classes of stock in privately held companies’ capital structures, the valuation of equity-based remuneration given by nonpublic corporations can be more challenging than it is for public companies. Prior to allocating that value to each equity security, valuation experts must first calculate the nonpublic company’s enterprise value. Based on each security’s right-derived liquidation preference, enterprise value is assigned. One approach that is frequently used to assign value to various classes of securities in a company’s capital structure is the option pricing model.

Once the equity award’s fair value has been established, the cost is recorded ratably over the award’s vesting period as operating expenses in the income statement.

Employing independent valuation advisers to examine their underlying assumptions and create option pricing models based on those assumptions is a common practice for companies that offer equity-based remuneration. Even when working with valuation advisors, it is essential for management to understand the valuation methodology and ensure the assumptions used in the model comply with the requirements of Topic 718.

Mergers and Acquisitions

Under ASC Topic 805, “Business Mergers,” the outcomes of business combinations are presented in consolidated financial statements. It mandates that business combinations be accounted for using the acquisition method and defines particular criteria for registering intangible assets. Topic 805 applies to all transactions or other occurrences in which a company acquires control of one or more businesses.

According to Topic 805, all of the identified assets and liabilities of the acquired business are allocated the purchase price, which is the total of the consideration paid, at the fair values as of the acquisition date. For company mergers, fair value is typically the benchmark of value; however, different valuation criteria are needed for some assets, such as equity-based payments and employee perks. Goodwill is defined as the purchase price over the amount allotted to the assets and liabilities, if any. In the uncommon event that an acquirer purchases something at a discount, the acquirer records a gain rather than goodwill.

Valuation advisers must make considerable estimations and utilize judgment when determining the fair value of acquired assets and liabilities, especially when choosing the best valuation approach. Even though most assets and liabilities can require some sort of adjustment, goodwill, intangible assets, and contingent consideration are some areas that demand thorough examination.

In some mergers and acquisitions, the acquirer may be required to purchase more shares of a subsidiary, subject to future results or fulfillment of other conditions outlined in the purchase agreement. In the consolidated financial statements, these provisions are included as contingent consideration at fair value.

Trademarks, trade names, customer lists, licenses, trade secrets, and patented technologies are examples of intangible assets. Customer lists, trade secrets, and software are just a few examples of intangible goods that lack physical existence. It is difficult for valuation consultants to separate these intangible assets from goodwill and value them separately. If an intangible asset acquired in a merger or acquisition is based on contractual obligations or other legal rights, or if it may be sold, transferred, licensed, rented, or exchanged, then it is recognized separately from goodwill.

Goodwill is the difference between the purchase price of the acquired business and the estimated fair market value of its assets and liabilities. It can be viewed as sums that do not meet the criteria for identifying intangible assets. The value of anticipated synergies from the business merger, the significance of the going-concern part of the current firm, and the assembled personnel are some examples of elements that might be included in goodwill.

Intangible assets are valued using methodologies like the income, market, and cost approaches, and their fair value is then recognized as a long-term asset in the consolidated financial statements. For instance, under the income approach, the multiple excess earnings method (MPEEM) is frequently used to evaluate intangible assets if it is possible to isolate discrete income streams. This approach is frequently used to value intangibles like customer connections. The MPEEM calculates the present value of the future profits expected to be earned throughout the asset’s remaining life. Other methods of valuation include the replacement cost method for software and the relief from royalty rate method for trade names.



Tax compliance, deferral, or minimization demands of an entity—public or private—are essentially determined by these three factors. The Internal Revenue Code (IRC), Treasury Regulations, revenue rulings, Internal Revenue Bulletins, judicial procedures, and other authoritative sources have all produced regulations as a result of these driving forces. Independent and objective valuation services are required to make sure that entities do not experience unfavorable tax consequences, regardless of which component is the primary one.

Estate and Gift Tax Valuation

The valuation of a business or business interest for estate or gift tax purposes is one of the most frequent tax-related engagements. Every transfer of property, whether real or personal, tangible or intangible, from one person or entity to another is subject to gift and estate taxes levied by the federal government. The value of an estate is crucial since it establishes whether and how much taxes the estate owes. When an individual or organization transfers property through a gift, appraisals are also required. The majority of the rules governing valuations for estate tax purposes also apply to valuations for gift tax purposes.

The standards for estate and gift tax values are set forth in the IRC, Treasury Regulations, and revenue rulings. General guidelines on the evaluation of nonpublic enterprises and their value dates for estate and gift taxes are provided under IRC section 2031. While section 2031(b) specifies that the value of comparable publicly traded guideline company stock should be taken into account as a proxy for the value of a privately held company for estate tax purposes, section 2031(a) specifies the range of property that is subject to estate tax as well as the applicable valuation date. The valuation date for gift taxes is the date of the contribution, according to IRC section 2512, which deals exclusively with the valuation of gifts. Estate and gift taxes may also be affected by other IRC provisions.

The Treasury Regulations, which are the IRS’s interpretations of the IRC, offer guidance on valuation-related questions for the purpose of determining estate and gift taxes. For instance, the fair market value is the definition of the standard of value for estate tax purposes in Treasury Regulations section 20.2031-1. Treasury Regulations section 25.2512-1 contains a description of the related statements for gift tax valuations. If the donations are sufficiently stated, Treasury Regulation section 301.6501 stipulates a three-year statute of limitations after which the IRS cannot contest a tax return. The donation of a value of the transferred property determined by an accredited independent assessor is one of the conditions for adequate disclosure.

Revenue rulings are IRS administrative decisions that apply the law to fact-specific circumstances without calling for a particular modification to the Treasury Regulations. All taxpayers are permitted to rely on a revenue judgment as precedent. Despite the fact that there are multiple revenue decisions on valuation, Revenue Judgment 59-60 is the most significant revenue ruling on appraisals for estate and gift tax purposes. The majority of Revenue Ruling 59-60’s discussion focuses on tax-related evaluations completed for privately held businesses. The decision offers instructions on how to value a firm or business interest, as well as capitalization rates and risk variables to take into account. Revenue Ruling 59-60 is frequently regarded as a reliable source for many different sorts of valuations due to its widespread recognition by the courts, valuation specialists, and consumers of valuation information.

Nonqualified Deferred Compensation

Nonqualified deferred compensation (NQDC) plans are governed by IRC section 409A, which also specifies guidelines for the timing of elections and distributions. Any agreement that postpones the payment of a portion of an employee’s salary to a later time is referred to as a “NQDC plan” in general. NQDC programs differ from qualified retirement plans like pension and 401(k) plans in terms of limits, tax ramifications, and reporting obligations.

To continue to be in compliance with section 409A regulations, NQDC plans must meet specific requirements. All pay that was deferred under the plan must be recognized as gross income if it doesn’t fulfill these requirements, and a 20 percent tax penalty is applied to the amount of deferred compensation that has been recognized. In some cases, accrued interest may also be relevant. Because of this, the cost of noncompliant plans can be very high for both the employee and the business.

Stock options, stock appreciation rights, and other equity-based compensation given to leaders and important employees are some of the most well-known NQDC plan types. If certain requirements are met, certain equity award arrangements are immune from the negative tax implications in section 409A. In general, NQDC plans are not permitted to alter their deferral choices during the year.

When incentive stock options and stock appreciation rights are granted at fair market value, section 409A typically does not apply to them. However, if a company grants an employee options with an exercise price that is less than the fair market value of the underlying security on the date of grant, section 409A will. The company’s common stock is typically the underlying security for options. The common stock’s valuation is crucial as a result.

According to laws, publicly traded firms must value their shares using the current values set on the securities market. Section 409A makes it substantially more difficult to value privately held businesses. For the purpose of calculating the exercise price of the equity awards, it is important to establish a fair market value for privately held stock. How to value the equity of nonpublic corporations is outlined in the AICPA publication Valuation of Privately-held-Company Equity Securities Issued as Compensation (2013, http://bit.ly/2qgWIPN). The practice tool provides detailed guidance on choosing the approaches to be applied for stock valuation and allocation. The option pricing approach, the current value method, and the probability-weighted expected return method are a few of the more popular valuation techniques.

The rules call for a safe-harbor valuation because nonpublic company valuations are arbitrary and frequently based on estimates. Unless it can show that the appraisal is blatantly irrational, the IRS must accept a safe-harbor valuation for the purposes of section 409A. The IRC lists three requirements, one of which is obtaining an impartial appraisal, to satisfy in order to be eligible for the safe-harbor valuation.



Engagements in litigation frequently center on the plaintiff’s economic losses and damage claims. In these kinds of engagements, valuation advisers are tasked with estimating the loss in earnings or the reduction in the worth of the plaintiff’s business. Due to the likelihood that litigation engagements may go to trial, it is crucial for expert witnesses to be independent of the parties involved in the lawsuit. Shareholder conflicts, divorce, bankruptcy, and contract breaches are typical examples of litigation engagements.

Shareholder Disputes

Dissenting shareholder laws are present in every state. Dissenting shareholder actions and minority oppression actions are two separate types of cases that frequently result in shareholder conflicts. When a minority shareholder thinks that the company’s activities will have a negative impact on its interests, a dissenting shareholder action is initiated. A merger, a reverse stock merger, or the sale or dispose of assets are examples of trigger events. The most frequent remedy in dissent actions is for the firm to buy the dissenter’s shares at fair market value; the less frequent remedy is the cancellation of the transaction.

In nonpublic companies, shareholder oppression actions often start when a minority shareholder seeks redress from the majority shareholder. In oppression lawsuits, the minority shareholder must prove that the majority shareholder engaged in misconduct, such as fraud, mismanagement, oppression, or other wrongdoing, while acting as an officer. In most courts, the typical remedy entails the firm buying the oppressed shareholder’s shares at fair market value. Another available remedy, while it is uncommon, is the company’s liquidation, with the proceeds going to each shareholder.

The rules for this field of valuation are established by state statutes and court precedent. In most states, fair value serves as the benchmark of value in both dissenting shareholder and oppressed shareholder instances; nonetheless, the courts have demonstrated that the notion of fair value is subject to judicial interpretation. In order to choose the valuation technique that will be used and the discounts and premiums that may be applicable, it is essential to understand how each jurisdiction determines the standard of worth.

The Model Business Corporation Act makes an effort to standardize fair value, despite the fact that shareholder dispute rules vary from state to state. The fair value of a corporation’s shares is defined by the act as the value determined just prior to the implementation of the corporate action to which the shareholder objects, using accepted and current valuation concepts and techniques typically used for businesses with similar characteristics, and without discounting for lack of marketability or minority status, except where appropriate. The fair value definition of the act has been accepted by the majority of states.

According to case law, fair value is the benchmark of value in New York in both shareholder oppression and dissenting shareholder proceedings. In New York, fair value does not permit applying discounts for lack of control, but it does permit taking into account a discount for lack of marketability. In Friedman v. Beway Realty Corp. [614 N.Y.S.2d 133 (N.Y. App. Div. 1994), the justification for prohibiting discounts for lack of control was established. This case confirmed how fair value is interpreted in New York. In order to prevent minority shareholders from gaining an unjust value for their shares when the dominating shareholders take unfavorable or oppressive measures, the court disallowed such reductions. However, the court also decided that reductions for lack of marketability should be taken into account, leaving the ultimate decision regarding their application to the courts. Recent legal proceedings have shown that the application of a discount for lack of marketability is not governed by a set criteria; rather, it appears that such reductions are determined on a case-by-case basis.

State governments decide what constitutes fair value and how to evaluate an investment for shareholder disputes. In order to employ the proper technique and have the valuation accepted by the court, valuation advisers must collaborate with attorneys to get aware about the legislation and case law of the region where the litigation will be heard.


Divorce processes must include valuation, especially when a business or commercial interest is at stake. When one spouse owns a business, divorce valuation disputes frequently emerge. In these situations, the firm is frequently the main means through which the business owner spouse transfers economic value to the non-business owner spouse.

Divorce valuations are completely state-specific and based on the particulars of each case. Normal valuation practices can be impacted by the standard of value, which frequently decides whether premiums or discounts can be applied. However, many state statutes use the terms “fair value” or “fair market value,” which are frequently interpreted differently across jurisdictions and may deviate from conventional definitions established in the IRC or GAAP. Fair value has been the main standard used in litigation matters involving a marital dissolution. As a result, it is crucial for valuation experts to be aware of the applicable standard of value in the country where the issue is being determined. In the real world, valuation advisers collaborate with lawyers to determine what fair value means. If the wrong valuation standard isn’t identified and used, the valuation may be changed or excluded, which will cost the client money.

Goodwill is one of the most important things to value in a divorce where one of the parties is a business owner. Any intangible value attributable to name, reputation, customer loyalty, and other comparable factors that are not separately definable can be referred to as goodwill for the owner of a business. The amount of goodwill to include, if any, in a divorce assessment frequently affects how much the entire marital estate is worth.

Depending on the specific jurisdiction, goodwill may or may not be considered in divorce disputes. Furthermore, many states make a distinction between business goodwill, which can be included in the marital estate, and personal goodwill, which is less frequently included. Enterprise goodwill refers to that which may be attributed to the company, but personal goodwill is related to the aptitude, expertise, and experience of the owner and is seen to be challenging to convey to other people. Court cases addressing this matter have shown that the specifics of each case must be taken into account when determining how to apportion goodwill.

Both business and individual goodwill are commonly accepted by New York courts as being a part of the marital estate. Based on the “increased earning capacity” of the license, the court decided in O’Brien v. O’Brien [66 NY2d 576 (1985)] that a professional license was marital property subject to equitable distribution. Following this decision, courts recognized both professional and personal goodwill as marital property that might be divided in a divorce.

Although there aren’t any established methods for valuing personal and business goodwill separately, various methods have proven effective in particular circumstances. One such technique is to evaluate the elements of goodwill and divide them into business and personal goodwill. The owner’s age, earning capacity, reputation, and knowledge, as well as non-compete clauses and the length of the business, are some of the characteristics specifically related to personal goodwill. The company’s marketability, client types, new customer sources, workforce, and competitiveness are then compared to these characteristics.

In addition to valuing businesses, valuation advisors are crucial in divorce cases because they may evaluate competing experts’ reports, help attorneys with depositions, help formulate case strategies, and testify as an expert witness.



Analyzing the relevant rules, laws, and regulations in detail is necessary for a complete understanding of business valuation services. CPAs should become familiar with all of the above to make sure that the assets in question are fairly valued and accounted for in the financial statements, whether they are looking to expand their business valuation service offerings or are starting an engagement where business valuation is a key component.


Source: The CPA Journal

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