Business appraisal – independence
The key business valuation standard, USPAP (Uniform Standards of Professional Appraisal Practice) states that appraisers must be independent of their client and the business being appraised. Your appraiser cannot have any financial interest in your company and try to benefit himself or herself by coming up with a specific figure.
Think about it, would you or your partners trust a business valuation prepared by the appraiser who also happens to own part of the company? There is a major incentive to overstate the value and reap the benefits of selling such a business at an inflated price. Truly, caveat emptor!
USPAP standard requires that the business appraiser disclose any interest in the company being valued. If the appraiser fails to do so, it would be seen as a serious violation as the business valuation report readers are not made aware of a potential bias.
Unsurprisingly, the ethical standards under the USPAP preclude any such interest on the part of the business appraiser. When preparing a business valuation for a client, you should clearly state in your report if any such interest or other concerns that could influence your conclusion exist.
Another tricky element to watch out for is contingent compensation of an appraiser. The question here is: does the business appraiser get paid for the time spent on the engagement? Or is there an additional compensation incentive based on the business value conclusion? While many other professional advisors take on projects on a contingency fee basis, this is unacceptable for business valuations.
The reason is the objectivity required of business appraisals. While a lawyer is expected to act as the client’s advocate, business appraiser must stick to the facts and come up with an unbiased opinion of business value. In other words, your business valuation should not be influenced ahead of time to achieve a specific outcome.
Unlike a business broker, the appraiser cannot be paid based on the success of the deal. If it was the case, no reasonable business person would believe the business appraisal. The whole premise of coming up with a credible estimation of what a business is worth would go right out the window.
Business people need to know if they can rely upon business valuation in making strategic decisions such as buying or selling a company, approaching a lender or talking with the tax authorities.
Business appraisers must earn credibility. This rules out a sales pitch or a biased opinion aimed to deceive. Used car sales tactics may work well at a dealership, but have no place in professional business appraisals.
If you consult the USPAP Standard, you will notice that the appraiser’s fees must be based solely on the time spent on the engagement. Contingent payments or compensation based on the business value result are strictly prohibited.