Business valuation: USPAP Restricted and Appraisal report formats.

Are you creating a business valuation report that must comply with the venerable USPAP standard? Then you have a choice to make: should your report follow the Restricted or Appraisal report format? What is going on here?

Restricted Report format – for client only

The USPAP Standard 10 draws a distinction between the restricted and full appraisal report formats. You need to make the choice based on the intended audience. If you are preparing the valuation report for the client’s eyes only, then the restricted format is enough.

Full Appraisal Reports required for outsiders

On the other hand, if your report is bound for other parties, you must adopt the appraisal report option. But in either case, your valuation report must clearly state who the intended recipients are and what format you have chosen.

In addition, your business valuation report must indicate the purpose of business valuation. For instance, pursuant to a proposed business sale, gift or estate taxes, or a legal dispute. Also, you should state the client identity as well, unless some overriding privacy concerns exist. The idea is that a reader of your appraisal report should know immediately whether the report is drafted for their benefit.

Why such nit picking by the USPAP standard creators?

Business valuation relies on a set of assumptions that must be disclosed in sufficient detail so that the intended audience can make sense of the valuation conclusions.

Short form appraisal exclusively for business owners

Let’s say you are the owner of the business being valued, and your long-term accountant is doing the appraisal for management information purposes. Then a certain level of familiarity with the company’s past history, current situation and future prospects is a reasonable assumption. That’s because both the owners and their accountants know quite a bit about the internals of the operation and its financial condition. So if the owner clients are the only ones reading the report, there is likely no need to belabor the facts everyone knows already.

More disclosure for lenders or outside investors

Now consider a situation involving an outside lender or equity investor. These third parties may well lack the intimate knowledge of the company. So they could need more than a terse summary included into your restricted appraisal report. Letting these readers know what you take for granted may help them understand the assumptions you made in your appraisal. And explain how you came up with the business valuation results.

Use your judgment on the level of detail in your appraisal

The USPAP standard does not spell out what level of detail you should include in your full scope appraisal report. You or your business appraiser should exercise judgment in disclosing the particular assumptions you make. This helps to guide your intended report readers through your business valuation analysis and conclusions.

True, professional investors such as venture capitalists invariably run their own due diligence. They need this to check your business value conclusions and come up with their own opinion of what the company is worth. But less sophisticated investors such as early stage angels, may well miss the subtle points about the company. As a result, they could come to a wrong conclusion about its value.

Beware that intentional omission of material facts about a proposed company investment may land you in hot soup even with the so-called accredited investors. When dealing with outsiders it is a good idea to err on the safe side and disclose the facts about the company that have a bearing on its value.

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