Business appraisal – resolving differences in results

If you look at business appraisals whose results differ significantly, the most common reason is the different assumptions. Consider, for example, the discounted cash flow valuation. If a lower discount rate is chosen by the appraiser, the resulting business value may be understated. On the other hand, an unreasonably low discount rate would lead to a surprisingly high valuation.

When the results are surprising, it is a good idea to explain in the business valuation report how you have selected your discount and capitalization rates. Standard methodologies, such as the Build-Up or CAPM cost of capital models, are widely accepted and easily checked.

When in doubt, consider running several valuation scenarios, each with a different set of assumptions. The results produced cover a range of reasonable business values and may well help dispel skepticism.

When valuation is uncertain: Best case, Worst case, Most likely case scenarios

The same goes for the forecasts of earnings. If you feel a single forecast is likely to be challenged, create several scenarios with different earnings projections. It is common in such cases to use the best case, worst case, and most likely case forecasts. You can use each to calculate the business value result and report them in your conclusions.

This makes sense if you think about it. Business prospects are uncertain, and each may be associated with a different earnings outcome or business risk. While it is not practical to create hundreds of business appraisals, you can reduce the complexity by considering the range of outcomes that are likely to occur. The resulting business value would most likely fall somewhere in between.

Reporting your business valuation: single-point or range of values

Newer business valuation standards, such as the AICPA SSVS No 1, support reporting your business valuation as a range. Doing so may help you convey the idea that a single-point business value is not the best estimate for the subject business. It would be better to state that the value may vary depending on the actual business performance going forward.

Assumptions drive business value conclusion

When looking at two business appraisals that disagree, carefully review the assumptions used in each. Both reports should identify the same key value drivers and risks and provide the rationale for their importance in business valuation. As you read the two reports, you should be able to conclude as to which set of assumptions is more reasonable.

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