Michael B. Lehner, CPA/ABV, CFE, ASA
How do private and public companies differ
How do private and public companies differ
October 15, 2014
Mapping out standards of value
December 1, 2014

Recycle paper and plastic, not business valuation reports

business valuation reports

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It may seem economical and time-effective to reuse an old business appraisal for a new purpose. But recycling an appraisal without your valuator’s approval could prove costly over the long run for a few simple reasons.

Value evolves over time

Think of value as a moving target. Internal and external factors — such as employee turnover, equipment condition, competition levels and government regulations — affect a company’s value over time. It’s also relevant to consider how active the industry’s current merger and acquisition market is.

To illustrate, suppose Al bought 5% of ABC Co. for $10 per share in 2004, based on a formal appraisal. Today, Bob wants a piece of the action, and ABC’s controlling owner offers to sell him shares based on the 2004 appraisal. Is it fair to use a 10-year-old appraisal?

The answer depends, in part, on how internal and external factors have affected the company’s value over time. The 2004 appraisal may overstate ABC’s current value, for example, if the company has lost 25% of its market share because of increased competition and several key employees have left to work for competitors.

Value has many definitions

Value also depends on how you define it. Different standards — such as investment value, fair value or fair market value — may apply. Or the basis of value — such as controlling or minority, nonmarketable — may differ.

Discounts for lack of control and marketability can have a significant impact on value. But valuation discounts don’t always apply and may differ depending on the size of the block. Adjustments to the company’s income stream also depend on the size of the block and the valuation purpose.

Continuing with the previous example, suppose Bob wants to buy 75% of ABC from the controlling shareholder. But Al bought only a minority interest in 2004. Valuing a large block of stock requires different adjustments and analyses than valuing a minority interest in a private firm with limited marketability.

Value is case-sensitive

An appraisal is valid only for the purposes listed in the report. Valuators face different considerations depending on why a business is being appraised. Shareholder disputes, mergers and acquisitions, and tax purposes are just a few common reasons for an appraisal.

It’s important to disclose all intended uses of a valuation report. In some cases, recycling may work out. But often the appraiser will need to update — or even redo — the appraisal, depending on how much the two assignments differ.

Continuing with our previous example, suppose ABC’s controlling owner is currently getting divorced. Should she (or her spouse) rely exclusively on the 2004 appraisal when divvying up the marital estate? Although the valuator might mention the previous appraisal in his or her report, there are many reasons it’s not valid — especially in a divorce context.

Suppose the divorce occurred in a jurisdiction that excludes all goodwill, or just the personal goodwill component, from the marital estate. If so, the valuator might need to value all or part of ABC’s goodwill to determine the interest that’s includable in the marital estate.

One size doesn’t fit all

An appraisal provides a snapshot of a company’s value on a specific date and for a specific purpose. Never assume an old appraisal still fits today — particularly when in a high-stakes litigation setting.

Michael Lehner

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.