Value Blog

I recently earned the ABAR (Accredited for Business Appraisal Review)  designation from the Institute of Business Appraisers.   The ABAR process is not a valuation, but a review of the valuation process.  The resulting business appraisal review opinion states whether the valuation report is credible.

The valuation process  is based on a body of knowledge and generally accepted appraisal practices.  The appraiser applies his or her informed judgment, based on the facts and circumstances related to the business to arrive at an opinion or conclusion of value.  The appraiser then documents the relevant information and explanations, supporting his or her conclusions in a valuation (or appraisal) report.

The business appraisal review process examines the credibility of the valuation work product, looking at the information in the report and the methodologies used.   If a report fails to disclose sufficient information, has analytical gaps or misapplies methodology, it may be found to lack credibility.

There are three types of review opinions:  a finding of concurrence, a finding of non-concurrence and a finding of no opinion.    A finding of concurrence indicates that the report is credible.  When there is insufficient information for the reviewer to issue a review opinion, a finding of no opinion will be issued.

A business appraisal review is not an opinion regarding the value of a business.  It cannot take the place of a full appraisal as a second opinion.

If you have questions regarding when a business appraisal review is needed, you can post or question or email me.

© 2010 Florida Business Valuation Group

The IRS first required that taxpayers use qualified appraisers under the Pension Protection Act of 2006 in relation to claiming charitable deductions. The definition of qualified appraiser has been incorporated into penalty rules as well.

A qualified appraiser is defined as an individual who has “verifiable education and experience in valuing the relevant type of property for which the appraisal is performed”[1]. In order to have the appropriate level of education and experience for a business appraisal, an appraiser must have completed business appraisal coursework with passing grades offered by a professional organization or college AND have two or more years experience in business appraisal. The Proposed IRS Regulations clarify that an appraiser who has received a recognized appraisal designation from a professional appraisal organization is deemed to have met the education and experience requirements. (See post “How do I find an appraiser?” April 20, 2009 for a list of the appraisal organizations.)

The Proposed IRS Regulations further identify people who are NOT qualified appraisers. In particular, an appraiser whose fee is based on the value of the business is not a qualified appraiser. The donor or the donee of the property being valued cannot prepare the appraisal either. Related parties to the donor or donee also fall into this group. Any individual who has been barred from practicing before the IRS with the three years before the appraisal date is not a qualified appraiser.

This is an overview of the rules for qualified appraisers. If you are valuing a business for IRS compliance purposes, you will want to make sure that the business appraiser you select is a qualified appraiser.

© 2009 Florida Business Valuation Group

There are terms that are frequently used in valuation that have specific meanings.  A group of the appraisal organizations got together and created a glossary defining various terms, the International Glossary of Business Valuation Terms.  Definitions below are taken from the Glossary.

An appraisal is the same as a valuation, which is defined as “the act or process of determining the value of a business, business ownership interest, security or intangible asset.”

The three approaches to valuation are the asset approach, the income approach and the market approach.  Within each approach are various methodologies used in the process of business valuation.

The asset approach is “a general way of determining a value indication of a business, business ownership interest or security using one or more methods based on the value of the assets net of liabilities.”

The income approach is “a general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more methods that covert anticipated economic benefits into a present single amount.”

The market approach is “a general way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold.”

Discounted cash flow method is “a method within the income approach whereby the present value of expected economic benefits is calculated using a discount rate.”

Discount rate is “a rate of return used to covert a future monetary sum into a present value.” The discount rate converts future net income, earnings or cash flow to a present value.  The rate is used in a formula which takes into consideration the point in time in the future when the benefit is expected to be received.

Capitalization rate or cap rate is “any divisor (usually expressed as a percentage) used to convert anticipated economic benefits of a single period into value.”  In simple terms is a rate that is divided in an estimate of net income, earnings or cash flow for a single period to arrive at a value of a business or business interest under the income approach.  The higher the rate, the lower the value.

A multiple is “the inverse of a capitalization rate.”

These definitions are a start to understanding the terminology used by appraisers.  In future postings I will discuss the application of different approaches and methodology.

© 2009 Florida Business Valuation Group

There are many different types of value. Below are a number of the types of value and examples of when they may apply.

• Fair Market Value: This type of value is used for estate and
gift tax reporting purposes, valuations for contributions to charities, valuation of ESOPs and other compliance purposes. Revenue Ruling 59-60, which is the definition used by the IRS, defines fair market value as “the amount at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

• Fair Value: There are two different types of fair value, one
for litigation purposes and one for financial accounting reporting purposes.

•• Statement on Standards for Valuation Services issued by the AICPA
defines fair value for financial reporting as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is the type of value used by companies when adjusting their assets or liabilities to fair value on their balance sheets under Generally Accepted Accounting Principles.

•• Fair value for litigation purposes is defined in each state either
by statute or through case law. This type of value is used to value interests in legal disputes between shareholders, partners or members.

• Intrinsic Value: This type of value is defined by the
International Glossary of Business Valuation Terms as “what an investor considers, on the basis of an evaluation of facts, to be the ‘true’ or ‘real’ value that will become the market value when other investors reach the same conclusion. Investors and analysts use this type of value to determine if stocks are selling at their true value.

• Investment Value: This type of value is defined by the
International Glossary of Business Valuation Terms as “the value to a particular investor based on individual investment requirements and expectations.” Each buyer and seller has his or her own value based on specific investment objectives.

• Net Book Value: Net book value is synonymous with the net
worth (or shareholders’ equity) of the business. It is the total net assets less the total liabilities as stated on the balance sheet of the business. The assets and liabilities are stated at historical cost, which may not be reflective of their current values.

There are other types of value as well. Rob Slee in his book Private Capital Markets, defines other types of value including economic value, insurable value, collateral value, owner value, and market value to name some others.

Sometimes the type of value is not as clear would seem. For example, in a divorce, some states use fair market value, while others may lean
towards the litigation type of fair value.

For more information on standards of value and the valuation process, please click here.

© 2009 Florida Business Valuation Group