Many courts and attorneys encourage the use of a joint valuation expert, rather than two dueling valuators. This can save time and money. It can also eliminate the perception that each side’s expert is a hired gun, advocating for his or her client’s financial interests. This article explains how a joint appraiser can speed the valuation process while avoiding potential acrimony, but also notes that joint appraisers don’t work in every situation.
Fraud can devastate a closely held business, and valuators do take fraud risks into account when appraising a private business interest. This article discusses the results of a biennial fraud study that looks at who is most at risk for fraud. The article also explains how fraud risks affect value.
Before starting any appraisal assignment, it’s imperative to map out the appropriate “standard of value” to ensure that everyone arrives at the same point. If not, the parties are likely to end up off course or in need of backtracking. This article discusses various standards of value — fair market value, strategic value and fair value — and when each standard may apply.
It may seem economical and time-effective to reuse an old business appraisal for a new purpose. But recycling an appraisal without a valuator’s approval could prove costly over the long run. This article points out that there can be several definitions of value; a company’s value can change over time; and valuators face different considerations depending on why a business is being appraised.
Private company appraisals are often derived from public stock data, because it’s more relevant and plentiful. But private and public companies can markedly differ in terms of risk, expected return and liquidity. Appraisals that fail to account for these differences could be making “apples-to-oranges” comparisons. This article lists some of these key differences between private and public companies.
The loss of a “key person” from a business could disrupt day-to-day operations, alarm customers, lenders and suppliers, and drain working capital reserves. But how do valuators quantify the value of key people? This article looks at the factors they consider when evaluating a key person discount and how they judge the ability of others to take over a key person’s responsibilities and relationships. It also discusses the three valuation methods they generally choose from.
Critics of the excess earnings method call it subjective, ambiguous and outdated. Yet the method remains a viable tool, especially when valuing small professional practices for divorce purposes. Because of its perceived simplicity, the excess earnings method can also serve as a meaningful sanity check for other methods. This article explains how it works.
Not every financial professional is qualified to value a business — especially if a third party will rely upon the appraisal. Earning a valuation credential requires specific coursework, testing, peer review and other prerequisites. This article helps business owners and attorneys sort through the various valuation credentials by summarizing the requirements of the most common business valuation designations.
In answering the question of what a business is truly worth, an appraiser considers many aspects of its operations, from management, to products and services, to the health of its industry. He or she also looks beyond the balance sheet, seeking any hidden assets or liabilities that may affect value. An appraiser analyzes several areas, including uncollectible receivables, inventories and fixed assets, in determining the appropriate adjustments.
Private business appraisal must be based on information available at the required date of appraisal, according to Revenue Ruling 59-60. Business valuation experts generally consider only information that is “known or knowable” on the valuation date. But there are exceptions to this rule. In a recent case, Estate of Jung v. Commissioner, the U.S. Tax Court made an important distinction between subsequent events that affect fair market value and those that provide an indication of value. This brief article explains this distinction and under what circumstances business valuation experts may be able to use subsequent events in their analyses.
Estate of Jung v. Commissioner, 101 T.C. 312, 1993