Value Blog

Different appraisal organizations’ standards refer to reports that express conclusions (opinions) of value by different terms.

The American Institute of CPAs (AICPA) and the National Association of Certified Valuation Analysts  both provide for Detailed or Summary Reports.  The American Society of Appraisers provides for Comprehensive Reports.  The Institute of Business Appraisers Standards allow for Formal  Reports.   Uniform Standards of Professional Appraisal Practice (USPAP) provides for an Appraisal Report.  While the standards for each organization is slightly different for the different types of reports, they basically require the same minimum information in reports.

The AICPA standards  provide for the following minimum disclosures in a Detailed Report:

• Identity of the client
• Purpose and intended use of the valuation
• Intended users of the valuation
• Identity of the subject entity
• Description of the subject interest
• The business interest’s ownership control characteristics, if any and its degree of marketability
• The valuation date (effective date)
• The date of the report
• The type of report
• The premise of value used in the report
• The standard of value used in the report
• The sources of information that are the basis for the conclusion of value reached in the report
• Assumptions and limiting conditions applicable to the report
• The scope of work or data available for analysis including any restrictions or limitations
• Any hypothetical conditions used in the report and the basis for their use
• If the work of a specialist was used in the valuation, a description of how the specialist’s work was used, and the level of responsibility, if any, the business appraiser is assuming for the specialist’s work
• The valuation approaches and methods used (other standards require disclosure of valuation approaches and methods rejected)
• Disclosure of subsequent events in certain circumstances
• Any application of jurisdictional exception
• Representation (also referred to as Certification) of the business appraiser
• Signature of the business appraiser or the appraiser’s firm (some standards require the business appraiser to sign the representation)
• A section summarizing the reconciliation of the estimates of value and the conclusion of value
• A statement that business appraiser has not obligation to update the report for information that comes to his or her attention after the date of the report.

The USPAP includes most of the items is the AICPA standards and also require that business appraisals must:

• clearly and accurately set forth the appraisal in a manner that will not be misleading;
• contain sufficient information to enable the intended user(s) to understand the report; and
• clearly and accurately disclose all the assumptions, extraordinary assumptions, hypothetical conditions and limiting conditions used in the assignment.

While the different appraisal organizations have slightly different requirement as to what must be included in a report, the above list is a general list of what should be in a report.

Whatever the case, the appraiser is required to follow the standard for the organization to which he or she belongs.   Standards can be viewed online at the organizations’ websites. Links to those standards are also available in my previous post.

© 2009 Florida Business Valuation Group

I constantly get requests and questions about “informal” valuations or rough estimates of value.  In some cases, individuals are deciding whether to buy a business and they want a sanity check that they are not overpaying for the business.  In other cases, most often divorce, the parties are trying to settle a case at mediation, so they do not have the same requirements that they would to prove value if they went to trial.

Regardless of the purpose, an appraiser who follows standards of any of the generally accepted organizations will have to perform a valuation in compliance with those standards if they are determining value.  In other words, there are no shortcuts if the client wants a number from the appraiser.

The definition of a valuation is very broad.  It includes the use of valuation approaches and methodology as well as the application of the appraiser’s judgment.  The standards all indicate how the appraiser develops the value.  A number of the appraisal organizations refer to the section of the standards dealing with this as developmental standards.

So while a client looking to purchase a business may not see the “number” that he requests as being a valuation, it most likely is.

In situations of litigation, there is often confusion about the applicability of standards.  This arises because of a reporting exception in some of the standards.  The reporting exception provides that appraisers do not have to present his or her findings in compliance with the reporting standards.  The thought behind this is that in a litigation or controversy matter, the opposing party or trier of fact will adequately question the appraiser so that the relevant elements are disclosed, making the format of the report less important.

If you think about it, the reason to hire an appraiser to provide you with a value is for you to have something that you can rely upon.  If you do not need the number to rely upon, then you do not need the appraiser.  When you are relying on a value provided by an appraiser, it should be developed in accordance with applicable standards.  To perform a valuation requires a minimum amount of time, and that time translates to money.  While some situations may not seem to warrant the cost, if an independent appraisal is necessary, there is no other option.

© 2009 Florida Business Valuation Group

There are many people qualified to value a business.  A number of professional societies offer certifications to professionals who meet the organization’s criteria.  In selecting an appraiser, you want to understand the differences between the certifications as well as the necessary skills to value a business.

The following organizations offer valuation designations:

• American Institute of Certified Public Accountants offers the ABV (www.aicpa.org)
• American Society of Appraisers offers the ASA (www.appraisers.org)
• Institute of Business Appraisers offers the CBA (www.go-iba.org)
• National Association of Certified Valuation Analysts (NACVA) offers the CVA and the AVA (www.nacva.com)

Each of the designations demonstrates that an individual has completed certain educational requirements, experience requirement and demonstrated some level of competency through testing and/or submitting sample reports.   You can visit each organization’s website for a list of the requirements for certification.  Additionally, the different groups also have searchable directories of credentialed appraisers.

However, it is important to understand an appraiser’s actual experience, not just the letters after their name.  Some good questions to ask a prospective appraiser are:

• How much of your practice is devoted to business valuation? While it is not necessary that a practitioner do business appraisal work full-time, it is necessary that he or she devote enough time to the work to be proficient.  Someone that does two or three valuations a year may not be the appraiser that you are looking for.
• What type of continuing education have you completed? There are many courses and conferences available to appraisers.  You want an appraiser who regularly participates in continuing education.  An appraiser who attends different courses and conferences each year is more likely to know the current developments in the industry, compared to someone who gets all of his or her hours in once every three years by attending a single conference.
• What type of valuations have you worked on in the past? Not all valuations are the same.  Someone who has only done appraisals for divorce litigation may not be the best fit for a client who needs an valuation for estate purposes. It is also important that you know what type of appraisal you need.
• Will you be the one responsible for valuing my business? You want to know who will be doing the work to appraise your business.  Some firms use staff or outsource some of the work.  This is not necessarily a bad thing.  Depending upon the purpose of the report, you may want to speak to the person actually doing the work to make sure that you are comfortable with his or her credentials and experience.
• What standards do you comply with? Each of the organizations mentioned above have appraisal standards which its members agree to comply with.  If your appraiser is a CPA, he or she may be required to comply with the AICPA business valuation standards.

These are some of the things to consider in selecting an appraiser.  If you have additional questions, please post a question.

 © 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