If you want your business appraisal to be taken seriously, you should consider compliance with a major appraisal standard, such as the USPAP. The Uniform Standards of Professional Appraisal Practice govern valuations of all kinds of property – including real estate, business personal property, and business enterprises.
Creating trustworthy business valuations
The reason USPAP exists is to promote public trust in business valuation results. If your appraisal follows the guidelines of this venerable standard, chances are your clients and anyone else reading your valuation report would feel comfortable that the conclusions of value are based on sound, well reasoned thinking.
While some jurisdictions may require that your business valuation comply with USPAP, the standard by itself is not enforced by law. Business valuation experts and seasoned business people may opt for a USPAP compliant business valuation whenever they anticipate challenges to their conclusions, or feel the added credibility of a professionally done business appraisal is called for.
In some situations, compliance with a standard may be mandatory. Examples include business valuations required by lenders, courts, or tax authorities.
So what does it mean to create a business valuation that measures up to the USPAP requirements? Here is the list:
- The appraiser must be prepared by an independent party who is competent in valuing businesses.
- The appraiser must gather and maintain all the supporting information used in business valuation.
- Your valuation must be done in accordance with the major USPAP Rules: Ethics Rule, Competency Rule, Scope of Work Rule, and Record Keeping Rule.
Rules of the game: Ethics, Competence, Scope of Work, Accurate Record Keeping
The Ethics Rule is made up of three parts: conduct, management and confidentiality.
Your business valuation should be done in an impartial, objective way, and be independent of any personal interest. For example, you should not stand to benefit from a certain business valuation result, such as a higher or lower valuation.
If you are hired to do an appraisal by a client, you should disclose that you are paid to do the work. In addition, you should seek to protect your client’s confidentiality by not disclosing the business valuation data or results to anyone other than the intended parties.
Reselling client data violates the USPAP Ethics Rule
Be sure you or your service providers do not try to profit from reselling the client’s data. This is strictly in violation of the USPAP Ethics Rule! If you are using Web-based software vendors, check to make sure they don’t resell your client’s data without permission.
Under the Competency Rule, the business appraiser must possess the necessary skill and experience to take on a business valuation assignment. Business appraisal calls for serious financial analysis. If you do not have the know-how, you should bow out.
To meet the Scope of Work Rule, you should clearly state what you intend to do in your business appraisal. The amount of information gathering, research, and analysis you do should be clearly stated in your business valuation report.
The Record Keeping Rule requires that you keep the complete records of what has been done in the course of your business valuation engagement. Some elements your records must include:
- Identity of your client and anyone else who will be receiving the business valuation report.
- Copies of written reports.
- Synopsis of any oral communications with your client.
- All data you have gathered in the course of your business valuation engagement.
It is a good idea to retain the documents for some time. USPAP Record Keeping Rule calls for a 5 year retention on all completed appraisals. Watch out – mishandling the documents or failing to produce copies on demand could invalidate your business appraisal and put you in violation of the USPAP Ethics Rule.