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Understanding an Appraisal To properly understand an appraiser’s conclusion, the user must also understand the underlying premises, conventions, and assumptions upon which the appraisal is based. If a user disagrees with an appraisal’s underlying premises, conventions, or assumptions, then the user should disregard the appraisal and should instead obtain an appraisal that is consistent with the user’s perspective. An appraisal may consist of determining the aggregate value of an economic category, such as assets, liabilities, equity, or invested capital. Alternatively, specific instruments within a category may be individually valued. Assets may be tangible (e.g., inventory and real estate) or intangible (e.g., contracts and goodwill). Liabilities may be interest bearing or non-interest bearing. Invested capital is the combination of interest bearing debt and equity. There may be different classes of equity (e.g., preferred, voting, and non-voting). Many businesses have convertible or derivative instruments in their financial structure. The value of a given category often varies with the values of other categories or specific instruments. Value is based on future expectations developed from existing available information. As time progresses, the available information and expectations are likely to change. Thus, an opinion of value is relevant only for a specific point in time. Using a dated appraisal could result in a flawed transaction. An interest in a privately held business is likely to have more than one value. The various values applicable to a single business interest will depend on the context of the valuation. Contextual issues that affect an appraiser's opinion include the Premise of Value (liquidation or going-concern), Standard of Value (fair market value, fair value, investment value, etc.) and the Level of Value (synergistic/financial, control/lack of control, and marketable/impaired marketability). Given the many issues to be considered in the development of an appraisal, it is advisable to consult a valuation expert. AAI can help business owners and their advisors understand the various valuation issues that apply to a specific circumstance. Asset Analytics, Inc. | |
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