by Mike Costello
posted August 22, 2008
 Mike Costello |
What to Expect
Most readers skim the report and skip ahead to the executive summary and conclusion. But you’ll get more from a valuation if you read it in its entirety. And you might uncover omissions or errors—a bonus if you’re reviewing the opposing expert’s report.
A comprehensive checklist of items to expect in an appraisal is beyond the scope of this article. But key elements of a comprehensive report include:
A definition of value. If any information—including the company’s name, the block size, the value standard and the purpose—is inaccurate, the expert will be discredited and the value conclusion may be invalid.
A review of the economy, industry and company. This part of the report demonstrates the expert’s understanding of business operations and external factors that may affect it. The review also provides essential information to business outsiders, including IRS agents, attorneys and judges.
An analysis of financial performance. Here the valuation professional gauges the company’s historical risk and return as well as providing an estimate of future earnings. The reader must consider, for example, whether these estimates appear reasonable and achievable, given capacity constraints.
The appraisal methodology. Valuation practitioners typically consider three techniques: the cost, market and income approaches. They also may take into account other valuation evidence, such as previous transactions, industry rules of thumb and buy-sell agreements.
The methodology section usually concludes with a value reconciliation, which identifies the chosen method and why it’s preferred.
Premiums and discounts. This part of the report identifies which discounts or premiums are needed to achieve the appropriate basis of value (for example, minority or controlling, marketable or nonmarketable). Control premiums, discounts for lack of control or marketability, and key person discounts are common. Customized samples of empirical data and in-depth analyses are essential to well-supported adjustments, especially when valuing minority interests in tax cases.
Professional Help
If you’re short on time, you may want to engage another valuation consultant to play “devil’s advocate” and review your first appraiser’s work. This second valuation expert can prepare summaries of the report’s strengths, weaknesses and possible mistakes.
An external review can also help bolster your report or provide ammunition against the opposition. The reviewer can assist in drafting meaningful deposition and trial questions. Depending on the situation, sometimes a third expert can help reconcile two divergent opinions.
Credentials are Required
Valuation techniques have become increasingly sophisticated and complex over the past two decades. Reliable business valuations now require experts who have dedicated themselves to the discipline and stay current with the latest developments. And dedicated valuation professionals are more likely to withstand an IRS challenge.
Local Case Study
We were retained in litigation involving a physician’s practice because the business appraiser’s methodology presented by the plaintiff was questionable. After review, we concluded that the report issued by the expert utilized a method of valuation that was indeed inappropriate when considering the purpose of the appraisal.
(D. Michael Costello is a Certified Public Accountant, business appraiser and consultant with more than 15 years of training and experience in business valuations and appraisals, business acquisitions and divestitures, and related fields.
He has written several articles for the Tennessee CPA and the AICPA’s Management Consultant newsletter.
He was the managing director and president of Costello, Strain & Company, PC, a CPA firm he established in May 1984. The firm was merged with Joseph Decosimo and Company, LLP, CPA’s in September 2003. Joseph Decosimo and Company, LLP was founded in 1972 and today is one of the top 100 CPA firms in the nation.)
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