CHAPTER 1Overview: Basics of the Engagement Process and Foundation for Valuation Analysis
A cynic … knows the price of everything and the value of nothing … A sentimentalist … sees an absurd value of everything and doesn’t know the market price of any single thing.
—Oscar Wilde, Lady Windermere’s Fan, 1893
PYRAMID STEP 1 Determine purpose, standard of value, premise of value, valuation date, nature of subject interest, limiting conditions, and regulatory requirements.
Understanding the engagement involves determining who the client is, what the intended purpose of the valuation is, and what needs to be valued. Is the analyst preparing a valuation of the whole company or a portion of it? Value to whom? Is the focus of the valuation on an equity holder perspective or an invested capital perspective? This information drives the work the analyst will perform. After these are determined, the analyst needs to probe further to identify the relevant valuation date, the standard of value, and the premise of value that are appropriate for the given purpose, so the analyst can determine the proper type of valuation services that can be performed (conclusion or calculation) and the type of report to be issued. Once these aspects have been determined, the analyst can then analyze the risks inherent in the engagement, the limiting conditions that surround it, the legal and regulatory requirements ...
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