Expert Valuation Reports

As discussed last month, there are various reasons why valuation services are employed, including litigation, transactions, compliance-oriented and planning-oriented engagements. Likewise, there are two types of engagements:

• Valuation engagements ' These are generally undertaken for purposes of estimating the value of a subject interest. Here, appraisers are free to apply valuation approaches and methodologies deemed appropriate in the circumstances and the engagement results in a conclusion of value (i.e., opinion of value).
• Calculation engagements ' These are undertaken when the appraiser and the client agree on the valuation approaches and the methods to use and the procedures to be performed. A calculation engagement does not include all procedures required for a valuation engagement. The value of the subject interest is calculated in compliance with the agreement between the appraiser and the client and is expressed as a range or a single amount.

The Basics

Valuations must be based on what was known or knowable, or was reasonably anticipated, at the valuation date. Subsequent events (i.e., conditions that were not known or knowable and/or events that arose subsequent to the valuation date) can be disclosed in the valuation report but are not foundational as to the opinion expressed. SSVS-1 paragraph 43 and IBA paragraph V.C.1.(12) state that in circumstances where events may be of such nature and significance that disclosure of such events may be warranted for informational purposes only, the events do not affect the determination of value at the valuation date. USPAP Statement 3 addresses retrospective appraisals and allows for data subsequent to the effective date to be considered as a confirmation of trends that would reasonably be considered by a buyer or seller as of that date.

Both SSVS-1 paragraph 10 and the IBA paragraph III.D provide a jurisdictional exception wherein appraisers should follow applicable published authority or stated procedures if any part of the Standards differs from published governmental, judicial or accounting authority or such authority specifies valuation development procedures or valuation reporting procedures. Nevertheless, other parts of the Standards continue in full force and effect. Several examples include, but are not limited to:

• Differences regarding the standards of value where the jurisdiction ( i.e., New Jersey Appellate Division in Brown v. Brown, A-985-00T5) ruled that “neither marketability nor minority discounts apply to the valuation of defendant's ' interest in a closely held corporation for purposes of equitable distribution.” Such application is more akin to a fair value standard used in shareholder dissent and/or oppression cases rather than the fair market value standard employed in New York courts in marital dissolution cases.
• Differences regarding the definition of a marital asset. For example, the New York courts recognize that professional degrees, advanced degrees, celebrity status and the like are subject to equitable distribution, whereas no courts outside of New York take this position.
• Differences in the treatment of institutional and personal goodwill. For instance, some states, such as New York, make no distinction, but other states, including Florida, recognize and prohibit the division of personal goodwill for equitable distribution in a matrimonial matter.

In addition to the jurisdictional exception, there is also a litigation exception in both Standards (i.e., SSVS-1 paragraph 50 and IBA paragraph V.D.), wherein the valuation is performed for a matter before a court, an arbitrator, a mediator or other facilitator, or for a matter in a governmental or administrative proceeding. Because the appraiser and his/her report are subject to the rigors of direct and cross examination in the courtroom setting, the exemption applies only to reporting provisions contained in SSVS-1 paragraphs 47-49 and IBA paragraphs V.A.-V.C., regardless of whether the matter proceeds to trial or settles. A detailed valuation report issued outside of the court environment should be issued such that its contents stand on their own. Notwithstanding the reporting exemption, developmental provisions contained in SSVS-1 paragraphs 21-46 and IBA paragraphs IV.A.-IV.1. regarding due diligence and other elements of conducting the valuation continue to apply if the appraiser expresses a conclusion of value or a calculated value.

Appraisers must also keep other considerations in mind. Professional competence is a key component of any valuation engagement, since estimating value requires the application of valuation approaches and methods and the essential component of professional judgment which requires special knowledge and skill. In
addition, the work product of third-party specialists (i.e., real estate or equipment appraisers, etc.) are relied upon based on due diligence deemed appropriate by the appraiser.

Reports

In general, there are two types of reports that can be issued by an appraiser: written reports and oral reports. Written reports are further distinguished for valuation engagements, with requirements being either for a detailed report or a summary report, as agreed upon by the appraiser and the client. In a calculation engagement, a calculation report is issued. Such reports contain restrictions on the users, uses, or both, since the levels of disclosure in a calculation report and procedures undertaken during a calculation engagement are lower than those in a valuation engagement; consequently they may be subject to misinterpretation by an independent party not familiar with the unique needs being addressed in the calculation engagement.

With some exceptions, Detailed Reports and Summary Reports include the same content:

• Letter of transmittal. (Not included in a Summary Report);
• Table of contents. (Not included in a Summary Report);
• Introduction. This contains a laundry list of items that might be included in this section or elsewhere in the report, including, but not limited to: identification of the client; purpose and intended use of the report; intended users; identity of the subject entity; description of the subject interest; ownership characteristics; degree of marketability; valuation date; report date; type of report; premise of value; standard of value; assumptions and limiting conditions; restrictions or limitations in scope of work or data available; hypothetical conditions; reliance on third party specialists; disclosure of subsequent events; jurisdictional exception; and additional information deemed useful by the appraiser.
• Sources of information. These could include financial and tax information sources, relevant documents and information provided by or related to the entity, summary of site visit to interview management and tour the facility, industry market and economic data, and other empirical sources.
• Analysis of the subject entity and non-financial information. (Not included in a Summary Report).
• Financial statement/information analysis, including rationales underlying any normalization or control adjustments, comparisons of current with historical performance, and comparisons of the subject company with industry trends and norms, if available. (Not included in a Summary Report).
• Valuation approaches and methods used including:
  a. The income approach, which is a composition of the benefits stream and methods used with relevant risk factors considered in assessing discount and capitalization rates;
  b. The asset-based or cost approach, which includes adjustments made to the balance sheet, types of cost and how cost was determined, and costs associated with depreciation and obsolescence; and
  c. The market approach, including the guideline public company method that identifies the companies selected and process used in the selection; pricing multiples used and how they were used; rationale for their selection and adjustments, if any; the transactions method, which includes the sales transactions and pricing multiples used, how they were used, rationale for their selection and adjustments, if any; and prior transactions of the subject company that describes the sales transactions used, how they were used and rationale for determining transactions if they are considered to be representative of arm's length transactions.
  d. In addition, rules of thumb, which are technically not a valuation method, may be used in combination with other methods to determine value.
• Valuation adjustments identifying each adjustment considered and determined to be applicable, and explaining the rationale and factors considered in assessing adjustments and describing the pre-adjustment value to which adjustments were applied. (Not included in a Summary Report).
• Conclusion of value.
• Representations of the appraiser, including, but not limited to: such factors as the appraiser's personal and unbiased analyses; opinions and conclusions of value are subject to contingent and limiting conditions noted elsewhere in the report narrative; the appraiser's compensation is not contingent on an action or event resulting from use of the report; the appraiser has no personal interest or bias with regard to the parties or subjects involved; etc.
• No obligation to update report or calculation of value for information disclosed after the date of the report.
• Other sections that identify non-operating assets, liabilities and excess or deficient operating assets, if any, the qualifications of the appraisers and other appendices and exhibits. (Not included in a Summary Report).

Conclusion

Regardless of the level of reporting, whether oral or written, detailed or summary, the appraiser is obligated to perform the due diligence deemed necessary to render an opinion or calculated value.

Johanne M. Floser is a Certified Business Appraiser (CBA) and Senior Manager with BST Valuation & Litigation Advisors, LLC, with offices in Albany, NY, and New York City. She has extensive experience in the valuations of privately held business enterprises, professional practices, professional licenses and advanced academic degrees for use in matrimonial matters, litigation, buy/sell transactions, estate tax proceedings and other circumstances.

As discussed last month, there are various reasons why valuation services are employed, including litigation, transactions, compliance-oriented and planning-oriented engagements. Likewise, there are two types of engagements:

• Valuation engagements ' These are generally undertaken for purposes of estimating the value of a subject interest. Here, appraisers are free to apply valuation approaches and methodologies deemed appropriate in the circumstances and the engagement results in a conclusion of value (i.e., opinion of value).
• Calculation engagements ' These are undertaken when the appraiser and the client agree on the valuation approaches and the methods to use and the procedures to be performed. A calculation engagement does not include all procedures required for a valuation engagement. The value of the subject interest is calculated in compliance with the agreement between the appraiser and the client and is expressed as a range or a single amount.

The Basics

Valuations must be based on what was known or knowable, or was reasonably anticipated, at the valuation date. Subsequent events (i.e., conditions that were not known or knowable and/or events that arose subsequent to the valuation date) can be disclosed in the valuation report but are not foundational as to the opinion expressed. SSVS-1 paragraph 43 and IBA paragraph V.C.1.(12) state that in circumstances where events may be of such nature and significance that disclosure of such events may be warranted for informational purposes only, the events do not affect the determination of value at the valuation date. USPAP Statement 3 addresses retrospective appraisals and allows for data subsequent to the effective date to be considered as a confirmation of trends that would reasonably be considered by a buyer or seller as of that date.

Both SSVS-1 paragraph 10 and the IBA paragraph III.D provide a jurisdictional exception wherein appraisers should follow applicable published authority or stated procedures if any part of the Standards differs from published governmental, judicial or accounting authority or such authority specifies valuation development procedures or valuation reporting procedures. Nevertheless, other parts of the Standards continue in full force and effect. Several examples include, but are not limited to:

• Differences regarding the standards of value where the jurisdiction ( i.e., New Jersey Appellate Division in Brown v. Brown, A-985-00T5) ruled that “neither marketability nor minority discounts apply to the valuation of defendant's ' interest in a closely held corporation for purposes of equitable distribution.” Such application is more akin to a fair value standard used in shareholder dissent and/or oppression cases rather than the fair market value standard employed in New York courts in marital dissolution cases.
• Differences regarding the definition of a marital asset. For example, the New York courts recognize that professional degrees, advanced degrees, celebrity status and the like are subject to equitable distribution, whereas no courts outside of New York take this position.
• Differences in the treatment of institutional and personal goodwill. For instance, some states, such as New York, make no distinction, but other states, including Florida, recognize and prohibit the division of personal goodwill for equitable distribution in a matrimonial matter.

In addition to the jurisdictional exception, there is also a litigation exception in both Standards (i.e., SSVS-1 paragraph 50 and IBA paragraph V.D.), wherein the valuation is performed for a matter before a court, an arbitrator, a mediator or other facilitator, or for a matter in a governmental or administrative proceeding. Because the appraiser and his/her report are subject to the rigors of direct and cross examination in the courtroom setting, the exemption applies only to reporting provisions contained in SSVS-1 paragraphs 47-49 and IBA paragraphs V.A.-V.C., regardless of whether the matter proceeds to trial or settles. A detailed valuation report issued outside of the court environment should be issued such that its contents stand on their own. Notwithstanding the reporting exemption, developmental provisions contained in SSVS-1 paragraphs 21-46 and IBA paragraphs IV.A.-IV.1. regarding due diligence and other elements of conducting the valuation continue to apply if the appraiser expresses a conclusion of value or a calculated value.

Appraisers must also keep other considerations in mind. Professional competence is a key component of any valuation engagement, since estimating value requires the application of valuation approaches and methods and the essential component of professional judgment which requires special knowledge and skill. In
addition, the work product of third-party specialists (i.e., real estate or equipment appraisers, etc.) are relied upon based on due diligence deemed appropriate by the appraiser.

Reports

In general, there are two types of reports that can be issued by an appraiser: written reports and oral reports. Written reports are further distinguished for valuation engagements, with requirements being either for a detailed report or a summary report, as agreed upon by the appraiser and the client. In a calculation engagement, a calculation report is issued. Such reports contain restrictions on the users, uses, or both, since the levels of disclosure in a calculation report and procedures undertaken during a calculation engagement are lower than those in a valuation engagement; consequently they may be subject to misinterpretation by an independent party not familiar with the unique needs being addressed in the calculation engagement.

With some exceptions, Detailed Reports and Summary Reports include the same content:

• Letter of transmittal. (Not included in a Summary Report);
• Table of contents. (Not included in a Summary Report);
• Introduction. This contains a laundry list of items that might be included in this section or elsewhere in the report, including, but not limited to: identification of the client; purpose and intended use of the report; intended users; identity of the subject entity; description of the subject interest; ownership characteristics; degree of marketability; valuation date; report date; type of report; premise of value; standard of value; assumptions and limiting conditions; restrictions or limitations in scope of work or data available; hypothetical conditions; reliance on third party specialists; disclosure of subsequent events; jurisdictional exception; and additional information deemed useful by the appraiser.
• Sources of information. These could include financial and tax information sources, relevant documents and information provided by or related to the entity, summary of site visit to interview management and tour the facility, industry market and economic data, and other empirical sources.
• Analysis of the subject entity and non-financial information. (Not included in a Summary Report).
• Financial statement/information analysis, including rationales underlying any normalization or control adjustments, comparisons of current with historical performance, and comparisons of the subject company with industry trends and norms, if available. (Not included in a Summary Report).
• Valuation approaches and methods used including:
  a. The income approach, which is a composition of the benefits stream and methods used with relevant risk factors considered in assessing discount and capitalization rates;
  b. The asset-based or cost approach, which includes adjustments made to the balance sheet, types of cost and how cost was determined, and costs associated with depreciation and obsolescence; and
  c. The market approach, including the guideline public company method that identifies the companies selected and process used in the selection; pricing multiples used and how they were used; rationale for their selection and adjustments, if any; the transactions method, which includes the sales transactions and pricing multiples used, how they were used, rationale for their selection and adjustments, if any; and prior transactions of the subject company that describes the sales transactions used, how they were used and rationale for determining transactions if they are considered to be representative of arm's length transactions.
  d. In addition, rules of thumb, which are technically not a valuation method, may be used in combination with other methods to determine value.
• Valuation adjustments identifying each adjustment considered and determined to be applicable, and explaining the rationale and factors considered in assessing adjustments and describing the pre-adjustment value to which adjustments were applied. (Not included in a Summary Report).
• Conclusion of value.
• Representations of the appraiser, including, but not limited to: such factors as the appraiser's personal and unbiased analyses; opinions and conclusions of value are subject to contingent and limiting conditions noted elsewhere in the report narrative; the appraiser's compensation is not contingent on an action or event resulting from use of the report; the appraiser has no personal interest or bias with regard to the parties or subjects involved; etc.
• No obligation to update report or calculation of value for information disclosed after the date of the report.
• Other sections that identify non-operating assets, liabilities and excess or deficient operating assets, if any, the qualifications of the appraisers and other appendices and exhibits. (Not included in a Summary Report).

Conclusion

Regardless of the level of reporting, whether oral or written, detailed or summary, the appraiser is obligated to perform the due diligence deemed necessary to render an opinion or calculated value.

Johanne M. Floser is a Certified Business Appraiser (CBA) and Senior Manager with BST Valuation & Litigation Advisors, LLC, with offices in Albany, NY, and New York City. She has extensive experience in the valuations of privately held business enterprises, professional practices, professional licenses and advanced academic degrees for use in matrimonial matters, litigation, buy/sell transactions, estate tax proceedings and other circumstances.