One of the most important standards you need to consider when writing a business appraisal report is USPAP Standard 10, published by the Appraisal Foundation. USPAP stands for the Uniform Standards of Professional Appraisal Practice.
As the name implies, the standard seeks to provide a set of ground rules. And professional quality report widely apply them. Just pick up a USPAP compliant business appraisal document. And you should see the reasoning and coverage expected of a well considered, comprehensive business value analysis.
USPAP standards in professional business appraisals
USPAP standards are widely used by professional appraisers all over the world, either as the major guiding principle or as part of national appraisal standards. This makes the report reader’s job much easier when reviewing valuations of foreign or domestic companies.
Most of the requirements in USPAP have emerged through the experience of many appraisers that they gained over the years. The main objectives that USPAP lays out are that the report should represent the appraisal in a way that is not misleading, contain enough information to enable the reader to understand the report, and clearly disclose all assumptions and limitations the appraiser has made.
USPAP standards are a moving target for compliance
USPAP standards are a work in progress. The standards are continuously updated to help business people and professional advisers overcome new challenges in valuing companies. The latest updates have spelled out two main report formats:
- Restricted report
- Appraisal report
What is a Restricted Appraisal Report?
You should follow the Restricted report format when you plan to provide the report for the client only. Suppose that a business valuation is advisory in nature and prepared for information purposes of the business owners. Since the owners know their company well, you can assume that they understand much of the information about the business. So you do not need to include it in the report. The resulting document should contain sufficient background to make sure the client can grasp the reasoning behind the appraisal results.
When you need to follow the Appraisal Report Format
Now imagine that a business valuation is done in order to communicate with prospective investors. You can no longer make the assumption that they are familiar with the company the way the owners are. So to comply with the USPAP standards, you need to follow the Appraisal report format. Importantly, your report should indicate that the intended audience now includes outside investors. The report must disclose more information about the company to make sure these outsiders can understand what the company is about.
This example brings up another key point. Business valuation conclusions may be different depending on the purpose of the appraisal. Your report should clearly state why business valuation is done and what is being valued.
The selection of standard and premise of business value is another important element to mention in your report. It is one thing to value the company on a fair market value business and assume that is a going concern, i.e. will continue running after the valuation. Your result for valuing the same company under the assumption of liquidation is likely to produce a very different result.
You should use all three approaches in your business valuation
Typical business valuation should include methods under each of the major approaches: asset, income and market. If you choose to omit some approaches from your analysis, you should explain to the reader why you did so. For example, you might be valuing a unique technology company that has no competitors to compare against. If so, you might opt for dropping the comparative market methods from your valuation, and focus on the income and asset methods instead. Your report should point out the reasons for making this choice.
The latest USPAP standard update requires a signed statement from the appraiser at the end of the report. The statement clearly spells out what the report scope and limitations are to avoid misunderstanding between the client and the appraiser.
Including all the required elements and language into your report to comply with the USPAP Standard 10 takes time and effort. You can speed up your work by starting with a well designed format and completing the steps to customize your report for your particular situation.