Valuing a business? You would do well to heed the requirements of the USPAP standards. USPAP is a short form for the Uniform Standards of Professional Appraisal Practice. These renowned standards govern valuation of all types of assets, including real and personal property, collectibles, and businesses. Business valuation is covered in USPAP standard 9, while reporting of appraisals is the subject of standard 10.
In addition to defining how business valuations are to be done, the USPAP standards comprise a set of governing rules which serve as guidelines for appraisal assignments. One such is the Scope of Work Rule.
USPAP Scope of Work Rule – the nitty gritty
Whether you are running a business valuation yourself or reviewing the work performed by another appraiser, you should make sure that these essentials are covered:
- The problem to be addressed by the appraisal is clearly stated.
- The scope of work required to create a credible business valuation is determined and actually completed.
- The scope of work done is stated in the business appraisal report.
What is included in the scope of work?
USPAP does not dictate what you do in your valuation. At a minimum, you should cover these bases:
- The company being valued must be clearly identified.
- You should state whether you have inspected the business assets covered in your valuation.
- You should indicate what type of research and data analysis you did as part of your valuation project.
- Discussion of the valuation methods and approaches you have used to arrive at your conclusion of business value.
What does the USPAP mean by stating the problem? You should outline who the intended users of your appraisal report are. It may be just the client or, possibly, third parties outside the business itself who may require additional information disclosure to make sure they understand your conclusions.
Business valuation may be used for a number of reasons. You should tell your report readers why you did the work. Is it to support the business purchase offer or asking price? To address the gift or estate tax situations? Or is the valuation done to defend against a legal challenge?
Business value changes over time as market conditions change. As a result, a business appraisal is meaningless unless you state clearly when the value was determined.
In addition, you should talk about any assumptions or limiting conditions that could have affected your results. If you were unable to get a hold of some data that could have a bearing on your valuation, state so in your report.
Typical conditions affecting the outcome of business appraisal include laws and regulations, local ordinances, and administrative decrees. If you conducted your valuation analysis under some hypothetical or unusual what-if scenarios, let your readers know.
Can scope of work change during an appraisal project?
When business appraisers start on a new project, they work with their clients to give them an initial estimate. But things may change as new details come to light. It is possible that the scope of work expands because more research is needed in order to shed additional light on value drivers, or new business risks come to the fore.
To do credible work, appraisers should advise their clients that the valuation scope of work is about to change. USPAP states that if you can’t do the additional work needed, you should beg off the assignment.
At the very least state in your report what work you have been unable to complete as well as what information gathering and research you did to get your results. This puts your report readers on notice that your business value conclusions may be qualified by these constraints.