Top Ten List
1. Define the project
In order for the appraiser to schedule the work, set the fee, and understand the client’s specific needs, the attorney needs to provide some basic benchmark information, such as:
- A description of the specific ownership interest to be appraised (number of shares, units, bonds)
- An understanding of the “level of value” for the interest being appraised
- A specification of the valuation date, which may be current, or may be a specific historical date
- A description of the purpose of the appraisal (why the client needs an appraisal and how the report will be used).
2. Understand the standard of value
There are different standards of value for appraisals under different circumstances and in different jurisdictions. Typical tax compliance appraisals are based on “fair market value”; certain jurisdictions require “fair value” in dissenters’ rights and divorce cases; and “liquidation value” may be appropriate in other cases.
3. Involve the appraiser early
Even in straightforward buy-sell agreements, family-limited partnerships, or corporate reorganizations, it is helpful to seek the advice of the appraiser before the deal is set to see if there are key elements of the contract document that could be modified to provide a more meaningful appraisal to the client.
4. Distinguish between a business appraisal and a real estate appraisal
Many of the corporate entities appraised either own or rent the real estate where the business is operated. For a successful operating business, the most meaningful valuation is typically based on some measure of capitalized earnings rather than the value of the underlying real estate. However, one should recognize that some businesses, due to the nature of their operations, are characterized more by their underlying assets, and less so by their earning power. This is true for asset-holding entities, and for some older family businesses with marginal earnings but with appreciated real estate on the books. Many business appraisers are not asset or real estate appraisers. They may need to obtain and consider a qualified real estate appraisal in the business valuation process.
5. Establish a reasonable time frame
The client’s business appraisal is a custom piece of work and he may not have immediately available all the information requested at the outset of a valuation assignment. Typically, a valuation project takes several weeks to complete once the authorization to proceed has been received. That can be accelerated to meet special needs, but it is usually a good idea to avoid rushing the production of a complex appraisal project.
6. Insist on an appraiser with experience and credentials
Each business appraisal is unique, and experience counts. Most business valuation firms are generalists rather than industry specialists, but the experience gained in discussing operating results and industry constraints with a broad client base gives the appraisal firm lots of ammunition to understand your client’s special situation. Credentials do not guarantee performance, but they do indicate a level of professionalism for having achieved and maintained them. Insist upon them.
7. Know the primary business valuation methods
Business valuation is an art as well as a science and appraisers will utilize and give different weights to various valuation methods as they suit the particular needs of an assignment. Key methods typically utilized include: transactions method (focuses on actual transactions in the security being appraised); underlying net asset value method (considers estimates of fair market value of the entity’s net assets, on a tax-adjusted basis); capitalization of earnings method (based on estimates of underlying earnings power times a derived capitalization rate); guideline company method (similar to using the capitalized earnings method, but uses comparable, or guideline companies to derive the appropriate capitalization rate); discounted cash flow (derives the present value of future cash flows, based on a combination of projected future cash flow and a derived discount rate appropriate to the situation). Other valuation methods may be appropriate to certain companies in specific industries where particular comparable transaction data may be available.
8. The appraisal is the first line of defense
A well-reasoned and documented appraisal report serves as an indication of the seriousness and professionalism with which an attorney addresses his client’s needs. Having an independent appraisal in a transaction situation provides a level playing field for negotiations in good faith on both sides. For litigation cases, the appraisal serves notice to the other side that they need to be equally prepared to support their opinion of value.
9. Litigation support issues
The business appraiser cannot serve as an advocate for the client, but it is always helpful to have an experienced business appraiser available for expert opinion testimony. In addition to providing a well-reasoned and documented report, the appraiser must be able to articulate the reasonableness of valuation and investment conclusions to the court and be able to deal with intensive cross-examination.
10. Expect the best
In most cases, the fee for appraisal services is nominal compared to the dollars at risk. The marginal cost of getting the best is negligible. Attorneys can help their appraiser do the best job possible by ensuring full disclosure and expecting an independent opinion of value. The best appraisers have the experience and credentials described above, but recognize the delicate balance between art and science that enables them to interpret the qualitative responses to due-diligence interviews and put them in a stylized format that quantifies the results.
- Buy/Sell Agreements
- Business Exit/Succession Planning
- Fairness Opinions
- SBA Loans
LITIGATION SUPPORT VALUATIONS
- Divorce Cases
- Shareholder Disputes
- Lost Profit/Economic Damages
- Expert Testimony
- Charitable Contributions
- Estate & Gift Taxes
- Family Limited Partnerships
- C to S Corporation Conversions