Keeping Your Balance: Business appraisal vs. business appraisal review

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A business appraisal (valuation) involves the gathering and analysis of information, the application of valuation methodologies, and informed judgement to reach a valuation opinion.

Business appraisal review is the critical analysis of another appraiser’s appraisal report.  In other words, the review examines whether the analysis and information provided in the report is sufficient to reach the stated opinion of value. An appraisal review is not an opinion about the value, but an opinion about the process the appraiser used to reach the opinion.

Both the Uniform Standards of Professional Appraisal Practice (USPAP) and the National Association of Certified Valuators and Analysts (NACVA) (the organization with which this appraiser is affiliated) have developed Appraisal Review Standards.  NACVA grants the ABAR (Accredited in Business Appraisal Review) designation. The American Society of Appraisers (ASA) developed 60 hours of multi-discipline appraisal review courses.  Both tracks are designed to address the development and communication of an objective appraisal critique.

When is an appraisal review appropriate? Business appraisal reviews are often used for the rebuttal of expert report in litigation; by a trustee or fiduciary in their due diligence regarding valuation reports; by small appraisal firms that do not have review capabilities in-house; and as a tool for identifying weakness in reports for settlement purposes.

The cornerstones to the review process to determine credibility involve the evaluation of the following processes applied to reach the opinion of value:

Relevance – the analytical nexus between the data, methodologies and analysis performed by the appraiser to his or her conclusions.

Reliability – the sufficiency of methods uses to replicate the original results.

General acceptability of chosen methodologies – the methodologies selected by the appraiser should meet the minimum requirements of peer review and be accepted and used by other appraisers in engagements with similar facts and circumstances.

Transparency – the inclusion in the appraisal of sufficient information and analysis known to the appraiser to reach his or her conclusion.

Adequate disclosures – the appraisal must not only present the known facts and circumstances to achieve transparency, but also include disclosures to support the foundation of the appraiser’s conclusions.

Completeness – the report must contain the elements necessary for an informed reader to replicate the opinion of value.

It should be noted that the appraisal review carries risk if the review appraiser expresses an oral or written opinion that the underlying appraiser was not competent, not qualified or did something incorrect without providing substantial evidence to support the assertions[1].  An appraisal review should be an objective, professional critique based on evidence measured against applicable appraisal standards, the logic of the presentation and the credibility of the appraisal report.  The appraisal review process can be difficult because many appraisal associations’ appraisal standards are vague and ambiguous guidelines rather than imposed appraisal practice rules.  Similarly, the concept of credibility is itself vague and ambiguous.

Kristin S. Coffey, CVA, MBA, is the director of Business Valuation Services with Mengel, Metzger, Barr & Co. LLP. She can be reached at [email protected].