If you are valuing businesses internationally, it is wise to consider compliance with the International Valuation Standards or IVS for short. These standards cover valuation of all types of assets world-wide, including businesses, real property, personal business property, market securities and more.
In the United States, the USPAP set of standards has long governed how appraisals are done across the broad range of assets. Standards 9 and 10, in particular, cover the valuation and reporting of business valuation results.
It turns out that both professional standards have enough in common to make valuations that comply with both a real possibility. If you value a business in the United States and you expect to present your findings to a group of international investors, be prepared to heed the call for both USPAP and IVS compliance. Professional appraisers and valuers, as these practitioners are called outside the US, gain public trust in their work by providing consistent, standards compliant business valuations.
The good news is the two standards are close enough in their spirit and scope. Both define how you should go about developing your opinion of business value. Both discuss the format and content of a business valuation report. Both require a level of competency and independence on the part of the business appraiser or valuer. The main differences are more often than not in the terminology that you can readily address in your appraisal reports.
Business valuation Code of Conduct
USPAP contains the Ethics Rule defining the expected behavior on the part of the business appraiser. IVS alludes to an expectation that the valuation engagement is conducted in an objective manner without any conflicts of interest and that the valuer should have the skill and knowledge required to do the job.
Departure vs Jurisdictional Exception
On occasion, business valuation professionals must act to address the existing case law or statutory requirements that may affect how the business valuation project is done. For example, a certain selection of valuation methods may be preferred by the courts. If this creates a conflict with the USPAP standard, the business appraiser should indicate that the work was performed under the Jurisdictional Exception, and clearly state what and why was done. Similarly, the IVS allows for a Departure and requires that you explain the actual legal requirement if this affects your valuation to a significant degree.
Assumptions – what the standards have to say
USPAP defines the Extraordinary Assumptions and Hypothetical Conditions. These are termed the Significant Assumptions and Special Assumptions under IVS. Even though the concepts are similar, using the IVS terminology lets you comply with both standards. That’s because while USPAP does not require that you use its definitions explicitly in your report, the IVS standard does. In either case, you should clearly outline what these assumptions are and how they could affect your reasoning and conclusions of value.
Scope of work – what your business valuation covers
The idea is that the business valuer should clearly communicate to the client what will be covered in the project. This should be done before the actual work begins in order to make sure the client understands and agrees with the goals of the engagement. You should make clear what will be done and, importantly, what limitations exist that may affect the outcome.
For example, you may state at the outset that no site visits or key employee interviews will be conducted. The client is then on notice that some potentially relevant information may not find its way into your business valuation analysis. It is always a good idea to spell out these details in your letter of engagement, have the client go over it and sign it.
Reporting formats – watch out!
A Restricted Appraisal Report format, acceptable under USPAP does not cut it under IVS. On the other hand, the USPAP compliant Appraisal Report is enough to meet the IVS reporting requirements.
Basis of value
IVS defines a number of bases of value to choose from: market value, market rent, equitable value, investment value, synergistic value, and liquidation value. USPAP requires that you state the type of value used in your analysis. For example, you can state that the fair market value is to be used in your valuation and discuss the highest and best use of business assets.
Business valuation approaches and methods
Both USPAP and IVS require that you include a section on the approaches and methods you have considered for your analysis. Generally, you should use methods from all three approaches, namely the asset, income, and market. The idea is that such a comprehensive set of tools helps you uncover the various value drivers and risks associated with the company being valued.
Should you choose to omit an approach from your valuation, you should clearly state the reasons why. For example, you may be valuing a truly unique company with little comparable sales evidence available. In this case, you may omit the market based methods from your work and focus on the income valuation instead.
Tying it all together
Both USPAP and IVS standards are intended to nurture public trust. If you are familiar with USPAP from your previous work or exposure to business valuations, you should have little difficulty reading or creating an IVS compliant business appraisal.