Why differences between business appraisals?

You may ask: if all business appraisers follow professional standards such as USPAP and SSVS, then how can business valuation results be so different? The reason is that clients who order business appraisers have a number in mind beforehand. The client wants a certain result and is rarely content with just knowing the answer.

There is always a reason why a business valuation is done. Say one party wants to value a business for buying, and the other is selling. In this case the seller is likely interested in a higher number than the buyer.

An impartial observer asked by both parties may be able to arrive at a neutral answer that may be described as a fair market value but please neither party. Such situations where both parties agree in advance to a binding answer are rare indeed.

What is more likely is that both parties are in negotiation with each other and are looking for evidence supporting their position. Think about tax disputes, borrowing funds, financial reporting and a business sale transaction.

In such situations where parties are looking to their self-interests, the business appraiser acts as an advocate for the client. The clients are likely to hire their own appraiser who is expected to support the client’s position.

Two questions arise here: can an appraiser be objective? Can the appraiser also be independent?

In cases of dispute it is possible for a professional business appraiser to be objective. But what about independence?

Indeed, independence of the client and absence of any material interest in the business being valued are required by all professional business valuation standards. The appraiser is expected to earn the fee based solely on the time and effort spent on the valuation assignment.

Objectivity involves making realistic assumptions. All business valuations rely on an assessment of the future economic conditions. Two appraisers who come up with drastically different results are likely making very different assumptions.

Future outcomes cannot be foretold with certainty. Thus, business appraisers have considerable leeway in judging the likelihood of some events taking place.

Think about a major product launch that is planned. A business appraiser may want to include the additional value creating potential of this product into the business value. Yet the product introduction is yet to be tested and its full effect felt by the business.

An adverse party may hire an appraiser who might assume a much less rosy scenario for the product introduction. The appraisal may conclude that the business value is far lower as a result.

So by changing the assumptions about a material event you can arrive at very different business valuation results. Neither answer is right or wrong – they are simply based on two sets of assumptions.

To sum up, business appraisals can seem objective, yet have very different answers.

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