Certified valuation analyst

What Is a Certified Valuation Analyst?

A certified valuation analyst (CVA) is a financial professional who specializes in determining the economic value of businesses, business ownership interests, and other assets for various purposes. This professional designation belongs to the broader field of Financial Certifications within finance. CVAs play a crucial role in providing objective assessments of value, which are essential in diverse situations ranging from financial transactions to legal disputes. Individuals holding the CVA credential are trained to apply various methodologies and standards to arrive at a well-reasoned business valuation, considering both tangible and intangible assets.

The role of a certified valuation analyst often involves in-depth financial analysis of a company's past performance, current financial health, and future prospects. Their expertise is particularly valuable for privately held companies or specific assets where market prices are not readily available. A CVA's work contributes significantly to informed decision-making in financial contexts, ensuring that valuations are defensible and adhere to professional standards.

History and Origin

The Certified Valuation Analyst (CVA) designation was established by the National Association of Certified Valuators and Analysts (NACVA). NACVA was founded in 1991 with the aim of supporting Certified Public Accountants (CPAs) and other business professionals in their pursuit of providing business valuation and financial litigation consulting services.²⁶,²⁵ The idea for such an association emerged from professionals attending business valuation seminars who recognized the need for a dedicated organization in this evolving field.²⁴

Since its inception, NACVA has trained tens of thousands of professionals in business valuation and financial forensics.²³ The CVA designation quickly became recognized as a core credential in the valuation industry. In 2013, NACVA merged its Accredited Valuation Analyst (AVA) credential into the CVA, solidifying the CVA as the organization's primary business valuation designation.²² Today, the CVA is the only valuation credential accredited by both the National Commission for Certifying Agencies (NCCA) and the ANSI National Accreditation Board (ANAB), underscoring its rigorous standards and recognition in the profession.²¹,²⁰

Key Takeaways

• A certified valuation analyst (CVA) is a professional who specializes in assessing the value of businesses and assets.
• The CVA designation is granted by the National Association of Certified Valuators and Analysts (NACVA).
• CVAs are critical for determining the value of privately held companies and other illiquid assets.
• Their work is utilized for purposes such as mergers and acquisitions, tax planning, estate planning, and litigation support.
• The credential requires specific education, experience, and successful completion of examinations and a case study.

Formula and Calculation

While there isn't a single formula for the "certified valuation analyst" designation itself, a CVA utilizes various established valuation methodologies. These approaches aim to quantify the economic value of a business or asset. The three most commonly applied approaches are:

1. Income Approach: This approach determines value by converting anticipated economic benefits (like earnings or cash flows) into a single present value amount. The most common method under this approach is the discounted cash flow (DCF) method. It involves projecting future cash flows and then discounting them back to their present value using an appropriate discount rate, often representing the cost of capital.

   [
   \text{Value} = \sum_{t=1}^{n} \frac{\text{CF}_t}{(1+r)^t} + \frac{\text{Terminal Value}}{(1+r)^n}
   ]

   Where:

   • ( \text{CF}_t ) = Cash flow in period ( t )
   • ( r ) = Discount rate
   • ( n ) = Number of periods in the projection
   • ( \text{Terminal Value} ) = Value of the business beyond the projection period

2. Market Approach: This approach estimates value by comparing the subject company or asset to similar businesses, business ownership interests, or securities that have been sold recently. This involves using various multiples (e.g., price-to-earnings, enterprise value-to-EBITDA) derived from comparable transactions or publicly traded companies.

3. Asset Approach: This approach determines value by summing the fair market value of individual assets and subtracting the fair market value of liabilities. This can be particularly relevant for asset-intensive businesses or those in liquidation.

A certified valuation analyst carefully selects the most appropriate approach or combination of approaches based on the specific purpose of the valuation, the nature of the business, and the availability of reliable data. Each approach involves numerous inputs and assumptions, requiring the CVA to exercise professional judgment.

Interpreting the Certified Valuation Analyst

A certified valuation analyst interprets and applies complex valuation methodologies to provide an opinion of value. Their role extends beyond merely calculating numbers; it involves understanding the underlying qualitative and quantitative factors that influence a business's worth. When a CVA issues a business valuation report, they explain the methodologies used, the assumptions made, and the data analyzed to arrive at their conclusion. This allows stakeholders to understand the basis of the valuation and its implications.

For example, when a CVA applies the income approach, they must interpret financial projections and assess the risks associated with those projections to determine an appropriate discount rate. In the market approach, they analyze comparable company data, adjusting for differences between the subject company and the guideline companies. The certified valuation analyst's expertise ensures that the valuation reflects current economic conditions, industry trends, and company-specific characteristics. The interpretation provided by a CVA is crucial for understanding the context and limitations of the valuation, which is particularly important in situations involving complex assets or unique business structures.

Hypothetical Example

Consider "TechInnovate Inc.," a privately held software development company that has received an unsolicited offer for acquisition. The founder needs a fair and defensible valuation to negotiate effectively. They engage a certified valuation analyst.

The CVA begins by conducting thorough due diligence, reviewing TechInnovate Inc.'s historical financial statements, internal projections, customer contracts, and intellectual property. The CVA notes that TechInnovate Inc. has consistent revenue growth and strong recurring revenue streams, making the income approach, specifically the discounted cash flow method, highly relevant. The analyst projects TechInnovate Inc.'s future cash flows for the next five years, considering expected growth rates and operating expenses.

Simultaneously, the CVA identifies several publicly traded software companies with similar business models and growth profiles to apply the market approach. They collect financial data from these comparable companies and calculate relevant valuation multiples, such as Enterprise Value/Revenue and Enterprise Value/EBITDA.

Finally, the CVA assesses the company's balance sheet under the asset approach, though it's less emphasized for a service-based technology company. After performing calculations using these approaches, the certified valuation analyst reconciles the different value indications, weighing the strengths and weaknesses of each methodology given TechInnovate Inc.'s specific circumstances. The CVA then provides a comprehensive report, explaining the valuation premise, the methods employed, and ultimately, an opinion of value that the founder can use in negotiations.

Practical Applications

Certified valuation analysts are essential in numerous real-world financial and legal scenarios. Their expertise in business valuation is frequently sought for:

• Mergers and Acquisitions (M&A): CVAs provide critical insights into the value of target companies, aiding buyers and sellers in negotiating fair transaction prices. They perform valuations during due diligence to ensure that the proposed deal aligns with the company's true worth.
• Tax Planning and Compliance: Valuations by a certified valuation analyst are often required for federal tax planning purposes, including gift and estate taxes, charitable contributions, and employee stock ownership plans (ESOPs). For instance, when valuing interests in partnerships for tax purposes, guidance from the IRS, such as IRS Publication 541, often necessitates a qualified appraisal.¹⁹,¹⁸
• Litigation Support: In divorce proceedings, shareholder disputes, or breach of contract cases, a CVA provides expert opinions on business or asset value, offering crucial support in legal disputes.¹⁷ This often involves providing objective analysis for damages calculations.
• Financial Reporting: Public and private companies may require a certified valuation analyst to determine the fair value of assets, liabilities, or equity for compliance with accounting standards, such as ASC 820 (Fair Value Measurement).¹⁶,¹⁵ This guidance helps ensure transparency and consistency in financial statements.
• Strategic Planning: Business owners utilize valuations to understand the drivers of their company's value, facilitating strategic decisions regarding growth, divestitures, capital structure, and succession planning.
• Financing and Capital Raising: When a business seeks external funding, lenders and investors often require a professional valuation to assess the collateral or the equity stake being offered.

Limitations and Criticisms

Despite the rigorous training and standards upheld by certified valuation analysts, the field of business valuation is not without its limitations and criticisms. One primary challenge is the inherent subjectivity involved in valuing privately held entities. Unlike publicly traded stocks with readily available market prices, the value of private businesses relies heavily on numerous assumptions and judgments made by the analyst. Different analysts, even when applying the same methodologies, may arrive at divergent results due to varying assumptions about future growth rates, discount rates, or comparable company selection.¹⁴,¹³

Critics point to potential biases that can influence valuation outcomes. For instance, an "engagement bias" may arise when a certified valuation analyst is hired by a specific party (e.g., a buyer or seller), potentially leading to a valuation that leans in the client's favor.¹² While professional standards emphasize independence and objectivity, the human element can introduce subtle influences. The complexity of valuing unique or highly specialized intangible assets also presents a challenge, as there may be limited comparable data.

Furthermore, economic uncertainties and unforeseen market shifts can rapidly alter a company's value, making even a meticulously prepared valuation quickly outdated. Academic research has explored these discrepancies and the psychological factors that can affect valuation judgments.¹¹ Therefore, while the CVA designation signifies expertise and adherence to professional guidelines, users of valuation reports should always understand the assumptions, methodologies, and inherent limitations of any valuation.

Certified Valuation Analyst vs. Accredited in Business Valuation

Both the certified valuation analyst (CVA) and the Accredited in Business Valuation (ABV) are prominent credentials in the field of business valuation, signifying a high level of expertise. However, they are issued by different professional organizations and have distinct requirements, particularly regarding a candidate's primary professional background.

The main point of confusion often arises because both designations equip professionals to perform business valuation services for similar purposes, such as mergers and acquisitions or tax planning. The key difference lies in the ABV's strict requirement for candidates to be CPAs, emphasizing a foundational background in accounting. In contrast, while many CVAs are also CPAs, the CVA designation is accessible to a broader range of financial professionals with significant valuation experience, even if they don't hold a CPA license. Both credentials are widely recognized and indicate a professional's commitment to the rigorous standards of the valuation field.

FAQs

What does a Certified Valuation Analyst do?

A certified valuation analyst (CVA) determines the economic value of businesses, business interests, or assets. They use various financial methodologies and analytical techniques to provide objective valuations for purposes such as transactions, legal disputes, tax planning, and financial reporting.

Why would someone need a Certified Valuation Analyst?

Individuals or businesses typically hire a CVA when they need an objective and defensible opinion of value for a non-publicly traded entity or asset. Common reasons include buying or selling a business, estate planning, resolving shareholder disputes, divorce settlements, or complying with regulatory requirements for fair value accounting.

What qualifications does a Certified Valuation Analyst hold?

To earn the Certified Valuation Analyst (CVA) designation, candidates typically need a bachelor's degree, a CPA license or substantial experience in business valuation, and must complete NACVA's training program and pass both a written exam and a take-home case study.³ They are also required to adhere to continuing education requirements to maintain their credential.²

Is a Certified Valuation Analyst recognized by the IRS?

Yes, the Internal Revenue Service (IRS) often requires valuations to be performed by qualified appraisers for various tax-related purposes, and the Certified Valuation Analyst (CVA) designation is widely accepted as a credential that meets these requirements. Their reports are crucial for demonstrating compliance with IRS guidelines, particularly for gift and estate tax filings.¹

How does a CVA determine value?

A CVA employs several standard approaches to determine value, including the income approach (e.g., discounted cash flow), the market approach (comparing to similar transactions or companies), and the asset approach (valuing individual assets and liabilities). The chosen approach depends on the purpose of the valuation, the nature of the business, and the availability of reliable data.