Value Blog

There is no way to shortcut a valuation.  If you are on a budget, you can make choices that will keep your fee down.  However, if you budget it too small, you may be better off with not spending money on a low cost appraisal.

Clients decide to have appraisals done to meet a need.  Usually it is to have documentation to provide that they made a transfer at fair market value.  The appraisal could be required by the IRS or the courts depending upon the purpose.  If an appraiser knows that you will be relying on his or her opinion to provide proof, the appraisal should be done to meet that purpose in compliance with appropriate appraisal standards.

Valuations done in compliance with appraisal standards take time.  So what do you do when your budget is not large enough for an appraisal?

You may be able to reduce your fee by asking for a summary report.  Shorter reports take less time to write.  However, just because you are getting a shorter report does not mean the appraiser will do less work to reach his or her opinion.

Another option is to get a calculation of value rather than a conclusion (or opinion) of value.  The disadvantage to a calculation of value is you will not get the same level of assurance that the number is accurate.  A calculation of value is a limited scope appraisal, where the appraiser and the client agree to limit the amount of work done with the understanding that if all the work was done, the resulting value could be different.  This type of report will not necessarily satisfy the requirements of the IRS or courts, but may work for negotiations.

The bottom line is that appraisals are not inexpensive.  There are some online “valuation calculators”, but the resulting information will usually not constitute an appraisal.  If your budget is too small for an appraisal, you may want to see if you can do without one rather than spending money on something that will not satisfy your requirements.  In any case, make sure to ask questions so that you understand that the report you are getting will meet your needs.

© 2009 Florida Business Valuation Group

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

Each appraisal organization has business valuation standards that apply to its members.  Standards can generally be classified as related to the developmental and reporting.   The different standards are posted online at:

• American Institute of Certified Public Accountants, Statement on Standards for Valuation Services No. 1:  AICPA Standards
• American Society of Appraisers,  ASA  Business Valuation Standards
• Institute of Business Appraisers, Business Appraisal Standards
• National Association of Certified Valuation Analysts, NACVA Professional Standards
• Appraisal Society, Uniform Standards of Professional Appraisal Practice  Standards 9 and 10

The standards are not uniform.   The appraisal oranizations did agree to uniform defiinitions of certain terms, the International Glossary of Business Valuation Terms.   When the AIPCA published its valuation standards in 2008, it added additional definitions.  While the details in the standards are different, the objectives are the same:  to ensure that appraisers do sufficient work to support their work, and that the work be reported in a manner that provides the user with enough information to understand.

© 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