Business valuation – complying with the USPAP and IVS standards

Are you are valuing businesses internationally? Then consider complying with the International Valuation Standards or IVS for short. These standards cover valuation of all types of assets world-wide. For example, businesses, real property, personal business property, market securities and more.

In the United States, the USPAP set of standards has long governed appraisals across the broad range of assets. Standards 9 and 10, in particular, cover the valuation and reporting of business valuation results.

It turns out that both professional standards have enough in common to make valuations that comply with both a real possibility. For instance, let’s say you value a business in the United States and expect to present your findings to a group of international investors. Then prepare to heed the call for both USPAP and IVS compliance. Professional appraisers and valuers, as these practitioners are called outside the US, need to gain public trust in their work. And they do so by providing consistent, standards compliant business valuations.

The good news is the two standards are close enough in their spirit and scope. Both define how you should go about developing your opinion of business value. Both discuss the format and content of a business valuation report. They also require a level of competency and independence on the part of the business appraiser or valuer. However, you will spot differences in the terminology that you can readily address in your appraisal reports.

Business valuation Code of Conduct

USPAP contains the Ethics Rule defining the expected behavior on the part of the business appraiser. IVS alludes to an expectation that you will do your valuation engagements in an objective manner without any conflicts of interest. In addition, the valuer should have the skill and knowledge required to do the job.

Departure vs Jurisdictional Exception

On occasion, business valuation professionals must act to address the existing case law or statutory requirements that may affect how the business valuation project is done. For example, a certain selection of valuation methods may be preferred by the courts. If this creates a conflict with the USPAP standard, the business appraiser should indicate that the work was performed under the Jurisdictional Exception, and clearly state what and why was done. Similarly, the IVS allows for a Departure and requires that you explain the actual legal requirement if this affects your valuation to a significant degree.

Assumptions – what the standards have to say

USPAP defines the Extraordinary Assumptions and Hypothetical Conditions. These are termed the Significant Assumptions and Special Assumptions under IVS. Even though the concepts sound similar, using the IVS terminology lets you comply with both standards. That’s because while USPAP does not require that you use its definitions explicitly in your report, the IVS standard does. In either case, you should clearly outline these assumptions and how they could affect your reasoning and conclusions of value.

Scope of work – what your business valuation covers

The business valuer should clearly communicate to the client what the project will cover. This should happen before the actual work begins. It helps the client understand and agree with the goals of the engagement. You should make clear what you intend to do and, importantly, what limitations exist that may affect the outcome.

For example, you may state at the outset that you will conduct no site visits or key employee interviews. The client is then on notice that some potentially relevant information may not find its way into your business valuation analysis. It is always a good idea to spell out these details in your letter of engagement, have the client go over it and sign it.

Reporting formats – watch out!

A Restricted Appraisal Report format, acceptable under USPAP does not cut it under IVS. On the other hand, the USPAP compliant Appraisal Report suffices to meet the IVS reporting requirements.

Basis of value

IVS defines a number of bases of value to choose from: market value, market rent, equitable value, investment value, synergistic value, and liquidation value. USPAP requires that you state the type of value used in your analysis. For example, you can state that you use the fair market value in your valuation and discuss the highest and best use of business assets.

Business valuation approaches and methods

Both USPAP and IVS require that you include a section on the approaches and methods you have considered for your analysis. Generally, you should use methods from all three approaches, namely the asset, income, and market. Such a comprehensive set of tools helps you uncover the various value drivers and risks associated with the company being valued.

Should you choose to omit an approach from your valuation, you should clearly state the reasons why. For example, you may be valuing a truly unique company with little comparable sales evidence available. In this case, you may omit the market based methods from your work and focus on the income valuation instead.

Tying it all together

Both USPAP and IVS standards aim to nurture public trust. If you know the USPAP from your previous work or exposure to business valuations, you should have little difficulty reading or creating an IVS compliant business appraisal.

See Valuation Tour