The Valuation Landscape

Financial valuation and business valuation emerge.
BY MICHAEL A. CRAIN

Business valuation is a relatively new discipline. Financial valuation—the process of determining the value of a financial asset or liability—belonged first to those on Wall Street who focused on trading securities; the concept of business valuation, or valuing private companies, arrived on Main Street about 25 years ago by entering the world of CPAs and those trained in finance. As the base of knowledge expanded, business valuation emerged as a consulting specialty.

The nature of valuation is different from general accounting. Where accounting largely involves the recording, classification and presentation of historic information, valuation is forward-looking, based primarily on estimates and, consequently, more subjective. In fact the IRS described valuation as an inexact science in revenue ruling 59-60. Still, the valuation process has a disciplined approach that practitioners must learn and apply properly in order to arrive at a reasonable estimate of value.

Financial valuation has expanded significantly; on Wall Street, it has become highly quantitative. Business valuation has evolved, too, making practice more complex and the need for specialized training more acute. As business valuation practices grow, some analysts are specializing by industry or technical area.

Five North American associations—the AICPA, American Society of Appraisers, Canadian Institute of Chartered Business Valuators, Institute of Business Appraisers and National Association of Certified Valuation Analysts—grant certifications in business valuation to individuals who demonstrate competency through testing and other criteria.

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