If you are valuing a business with a view to sharing your appraisal results with other business people or professionals, it is a good idea to make sure you comply with major standards.
Perhaps the most important and best known professional standard governing all kinds of appraisals, including business valuation, is the venerable USPAP, or the Uniform Standards of Professional Appraisal Practice. Yes, you guessed it, your house appraiser also must comply with the USPAP in order to provide an appraisal for a home purchase or a refi.
Rules providing guidance for business valuation
In addition to the actual standards defining how you should go about valuing a business, USPAP includes a set of rules. The rules outline acceptable norms of conduct under the standard. Here is what the rules are about:
The Ethics Rule establishes the fundamental requirements of the appraiser’s professional integrity, impartiality, objectivity, unbiased judgment, and overall ethical behavior.
The reason for the Ethics Rule is to preserve public trust in the appraisal profession. To achieve this goal, your business valuations must be conducted in a highly ethical manner, honor client confidentiality, and be managed in a professional manner.
Keeping clean business appraisal records
The Records Keeping Rule defines the record keeping requirements for documenting and reviewing the valuation assignment.
Business valuations produce a lot of details, from statement of the problem, to market data analysis, assumptions, and decisions about business valuation methodologies and conclusions. To be useful, a business appraisal must be backed by a traceable, transparent document trail that can be reviewed in case of need.
Showing competence in conducting business valuations
The Competency Rule, unsurprisingly, states the need for the appraiser to demonstrate knowledge and experience in valuation.
This Rule is pretty obvious. To create a business appraisal others can rely on for critical decisions, you should possess the necessary knowledge and skills to get the job done. If in doubt, professionals should beg out of an engagement that seems beyond their abilities.
Well defined scope for every business appraisal project is a must
The Scope of Work Rule requires a clear definition of the appraisal engagement requirements, including the research and analysis to be performed.
It is always a good idea to clearly state what your business valuation project is about, why you are doing it and what you intend to do to get a result your clients can trust.
When the law conflicts with business valuation standards
The important Jurisdictional Exception Rule addresses the situations where the applicable law or public policy may conflict with the USPAP standard on what a business valuation must provide.
If you discover that a law requires you to do things differently than prescribed by the USPAP, you should state what this law is and explain the limitations to your business valuation work that result from the need to comply with the law.
This way, your clients and business valuation report readers would know what may be missing. Note that attorney instructions or client wishes do not qualify for a jurisdictional exception. This is the purview of the actual laws and regulations.