Apprasiers 101

A business appraiser is like an expert detective investigating the true value of a business. They gather and analyze evidence to build a comprehensive picture of the company's worth, considering factors beyond just its assets and liabilities. A good analogy for understanding the role of a business appraiser is a real estate appraiser evaluating a property for sale.

Real Estate Appraiser: Considers the property's physical condition, size, location, amenities, and recent sales of comparable properties in the area. They might also factor in income-generating potential, like rental income for an investment property, or the cost to replace the building.

Similarly, a business appraiser goes beyond just a business's tangible assets (like buildings, machinery, and inventory). They consider the company's financial history (revenue, profits, cash flow), market conditions (industry trends, competitive landscape), and intangible assets (intellectual property, brand reputation, customer relationships, management team quality).

For investors and potential buyers, a business appraisal provides a clear and objective measure of a business's worth, helping them make informed decisions about whether to invest or acquire. It can also be a useful tool in negotiations, providing a benchmark for determining a fair price.

Business appraisers specialize in the valuation of business enterprises and their intangible assets including intellectual property (patents, trademarks, domain names), customer lists, goodwill, and going-concern. They are also used to resolve disputes related to estate and gift taxation, divorce litigation, buy-sell agreements, as well as many other business and legal purposes.

Business appraisal is as much an art as it is a science. If you are interested in learning more about the world of business valuation, be sure to check out The Art of Valuation. This collection of essays by 29 top experts from overlapping disciplines uses storytelling to capture a flavor of the romance, the intrigue, the art and heart of business appraisal and its many unique practitioners. Beginning with a history of the profession, The Art of Valuation reveals the nuances, tips and tactics, and ways of thinking about business appraisal that make the difference between good and great work. Business valuation professionals are frequently engaged as independent financial appraisers for purposes of valuing fractional or partial ownership interests. The selection of and reliance on appropriate methods and procedures depends on the judgment of the appraiser and not on any prescribed formula. One or more approaches may not be relevant to a particular situation, and more than one method under an approach may be relevant.

The Appraisal Foundation® (Foundation) does not develop a set of qualification criteria or credential business appraisers, but their Partner organizations do. If you would like to learn more about how to become a business valuer, please contact the American Society of Appraisers (ASA) or Royal Institute of Chartered Surveyors (RICS) to learn more.

Difference in ASA, NACVA, AICPA-ABV, CBV Institute, and RICS and American Society of Appraisers

Formed in 1936, ASA is a multi-discipline, non-profit, international organization of professional appraisers representing all appraisal disciplines: Appraisal Review and Management, Business Valuation, Gems and Jewelry, Machinery and Technical Specialties, Personal Property and Real Property. ASA’s mission is to foster the public trust of our members and the appraisal profession through compliance with the highest levels of ethical and professional standards.

The American Society of Appraisers (ASA) requires its business valuation (BV) professionals to comply with the Uniform Standards of Professional Appraisal Practice (USPAP). The ASA also provides its own set of Business Valuation Standards (BVS), which, along with Statements on Business Valuation Standards, Advisory Opinions, and Procedural Guidelines, detail the specific criteria for developing and reporting on business valuations and securities. These BV-specific standards must be used in conjunction with the overarching USPAP and the ASA's own Principles of Valuation and Code of Ethics. The standards emphasize that a business valuation report must be complete and transparent, allowing a reader to reproduce the appraiser's work without direct consultation.

Business valuation is the act or process of determining the value of a business enterprise or ownership interest therein. In developing a valuation of a business, business ownership interest, security, or intangible asset, an appraiser must identify and define, as appropriate:

1. The client and other intended users

2. The purpose or intended use of the appraisal

3. The type of engagement as defined in BVS-I General Requirements for Developing a Business Valuation, Section II.C

4. The business enterprise to which the valuation relates

5. The type of entity (e.g., corporation, limited liability company, partnership or other)

6. The state or jurisdiction of incorporation, if applicable

7. The principal business location (or headquarters)

8. The business interest under consideration

9. The standard of value applicable to the valuation (e.g., fair market value, fair value, investment value, or other) 10. The premise of value (e.g., going concern, liquidation, or other)

11. The level of value (e.g., strategic control, financial control, marketable minority, or non-marketable minority) in the context of the standard of value, the premise of value, and the relevant characteristics of the interest

12. The effective (or “as of”) date of the appraisal

13. Any extraordinary assumptions used in the assignment

14. Any hypothetical conditions used in the assignment

The appraiser shall develop a conclusion of value pursuant to the valuation assignment as
defined, considering the relevant valuation approaches, methods and procedures, the information available and appropriate premiums and discounts, if any.

Rules of thumb may provide insight into the value of a business, business ownership interest, security or intangible asset. However, value indications derived from the use of rules of thumb should not be given substantial weight unless they are supported by other valuation methods and it can be established that knowledgeable buyers and sellers place substantial reliance on them.

As appropriate for the valuation assignment as defined, and if not considered in the process of determining and weighting the indications of value provided by various procedures, the appraiser should separately consider the following factors in reaching a final conclusion of value: A. Marketability or lack thereof, considering the nature of the business, the business ownership interest, security or intangible asset B. The effect of relevant contractual and/or other legal restrictions C. The condition of the market(s) in which the appraised interest might trade D. The ability of an owner of the appraised interest to control the operation, sale, or liquidation of the relevant business E. Such other factors that, in the opinion of the appraiser, are appropriate for consideration.

An appraiser assumes responsibility for the statements made in a comprehensive written report and accepts that responsibility by signing the report. To comply with this Standard, a comprehensive written report must be signed by the appraiser. For the purpose of this Standard, the appraiser is the individual or entity undertaking the appraisal assignment under a contract with the client.

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