The Independent Review of a Valuation Report - Part 2

In "The Independent Review of a Valuation Report – Part 1", we discussed the need for an independent review of a business valuation report prepared by an appraiser for ESOP purposes.  But this is just one of many situations in which one would want an independent review of a business valuation report by a review appraiser.  Other common situations include:

  • Litigation including disposition of assets in dissolution of marriage proceedings or shareholder disputes
  • Financial reporting including purchase price allocation and goodwill impairment analysis
  • Any other situation where the results of the valuation are critical

An independent review of an appraiser's business valuation report by a review appraiser is governed by and should be prepared/reported in accordance with Standard 3 of the Uniform Standards of Professional Appraisal Practice (USPAP).

In order to express such an opinion, the review appraiser must do more than just simply read the report and comment on certain perceived weaknesses in the report.  So what does a business valuation review involve?

A business valuation review includes those processes and procedures that are requisite for expressing an opinion on the appropriateness and credibility of the analysis used in the valuation so that the user of the report can rely upon it.  The review includes analyzing the process used by the appraiser for completeness, adequacy, relevance, appropriateness, and reasonableness. 

Specifically, the valuation review attempts to answer the following questions:

Definition of Assignment   Was the assignment properly defined?

Standard of Value    Is the selected standard of value appropriate for/consistent with the definition of the assignment?

Due Diligence Documentation    Given the standard of value selected, were all relevant factors considered and disclosed in the valuation report and were the disclosures adequate and complete?  Was there any information that should have been in disclosed in the report that is missing?

Due Diligence Assessment    Based on the results of the due diligence documentation, was the effect of the factors properly considered in the valuation process with respect to:

  • Assessment of the Company's future financial performance?
  • Assessment of the level of risk of an investment in an equity  interest in the Company?

Selection of Methods    Were the appropriate valuation approaches and methods selected and used given the results of the preceding analysis?

Application of Methods    Were the selected valuation approaches and methods properly applied?

Reconciliation/Wrap Up    Were appropriate valuation discounts/premiums considered and properly applied in the valuation?  Were the results of the valuation methods properly reconciled?

Compliance    Does the valuation report comply with appropriate preparation/reporting standards?  Was the valuation report properly referenced, documented, and supported?

Conclusion  Given the above, was the final conclusion of value consistent with the definition of the assignment and is it reasonable and supportable?

The procedures for reviewing a business valuation report prepared by another appraiser include:

  • Replicating the process used by the appraiser
    • Tracing numbers to source documents
    • Testing of all mathematical calculations
  • Evaluating the propriety and completeness of the information considered by the appraiser
  • Tracing preliminary conclusions through the report to the final value conclusion
  • Analysis of the internal consistency of the information/assumptions used in the valuation
  • Checking compliance with applicable standards and generally accepted appraisal practices

A valuation report can be lengthy and confusing, filled with technical jargon and complex calculations, and may contain discrepancies not visible to the untrained eye.  A valuation report review objectively examines the content, process, and disclosures of a report to ensure that it is credible and consistent with generally accepted appraisal practices.

It is important that the appraiser performing the review have extensive valuation experience and maintain the Accredited in Business Appraisal Review (ABAR) credential. An independent review of a valuation report should help the client better understand the valuation and enable him or her to accept the report with greater confidence.