Archive for April, 2017

The USPAP standards, published by the Appraisal Foundation, cover every element of valuation for real, personal, and business properties. When it comes to reporting your business valuation results, it’s worth consulting Standard 10.

The Standard does not dictate the choice of form, format or style in compiling valuation reports. This is left to you as an author. The important point is the content. This makes sense as business appraisals address a wide range of audiences and situations, each with its own preferences.

To comply with the USPAP Standard 10, your report should state clearly all the assumptions, special considerations, and sources of information you have used in conducting your business valuation. The idea is that your intended readers should have enough to understand how you came up with your conclusions.

Appraisal and Restricted Appraisal report options

The latest Standard 10 makes a distinction between two major options: an Appraisal Report and a Restricted Appraisal Report. The latter is only intended for the client. Whenever other parties are going to be reading the report, the Standard 10 requires that you follow the more general Appraisal Report option.

The key difference is the depth and type of information you provide in your report. It is one thing to create a valuation just for your client, who is very familiar with the company. You can assume a level of understanding of the business specifics that is not available to outsiders. For example, a lender or investor looking to put money into your client’s company would likely require a lot more disclosure to make up their mind.

Avoid one-size-fits-all boilerplate reports!

If you do prepare a full blown Appraisal Report, be sure to indicate who the intended readers are. Everyone’s needs for information are different and a ‘one-size-fits-all’ does not work in business valuation.

Elements of USPAP Standard 10 compliant appraisal report

The key elements you need to include in a standard-compliant report are these:

  • Identify the client and any other recipients of the report.
  • State the purpose of the business valuation.
  • Discuss what is being valued, such as business assets included in your analysis.
  • State if the valuation is done on a controlling interest basis.
  • Indicate if there is any limitation as to the marketability of business assets.
  • Mention what standard and premise of business value you are using in your work.
  • State the date of your appraisal and the reporting date, if these are different.
  • Outline the scope of your analysis, including the sources of information researched and used.
  • Describe the approaches and methods used for calculation of business value and explain how you reached your value conclusion.
  • Explain any unusual circumstances and conditions that influenced your valuation.

Use all three valuation approaches

A USPAP Standard compliant valuation should use all three valuation approaches. That is to say, your analysis should look at business value from the Asset, Income and Market perspectives. If you decide to omit any of these major approaches, you should explain it in your report.

For example, you may be appraising a pioneering technology company that has no equals in the marketplace. It may be reasonable to forgo the use of the market approach methods as no reliable comparables are available.

Don’t forget to sign your report and mention anyone else who may have helped in your valuation. Clearly state the scope and limitations of your analysis so that your readers know what to expect. Your business appraisal report is the finished work product and represents the quality of your work.

Part of business appraisal is assessing the value of business assets. This is especially important if the company is for sale and the purchase price needs to be allocated across its asset base.

Business equipment values are typically established by market comparison. A business machine is valued based on its functional utility and condition, regardless of where it is located and who currently uses it.

The secondary market for used business equipment is well established. Equipment dealers do business in just about any kind of machinery a company can require. As a result, knowledgeable dealers have a pretty good idea of what a given machine is worth.

A company can make a choice of getting a new piece of equipment or finding a used machine that is cost effective and can perform the same function. The comparison boils down to the age, condition, and utility relative to the price of new versus used equipment.

If you are valuing business assets, the first stop should be a few equipment dealers. These intermediaries are usually happy to provide pricing information for free because the inquiries keep them abreast of who and why uses the machinery. This could generate a useful contact for future business deals.

Equipment auctions are another source of pricing information. When businesses are dissolved, their assets go up for sale. The prices paid at such auctions offer you direct evidence of what the market values for similar equipment are. You can even trace the age of sold machines based on the model and serial number information published by the auctioneer.

Just as with the company as a whole, market values of business assets can change over time. Be sure to pay attention to the timing and relevance of comparable sales when working out the values of your company’s machinery and equipment.