Economist Criticizes Guidance Setting Appraiser Requirements

From: JMatthew.Sims@choosebroadspire.com

My comments are in regards to business valuations.

I have difficulty with all of the "standards" that different organizations subscribe to. Everyone of them has a clause in them stating that if the appraiser deviates from a standard method, they need to state so in the appraisal. I have seen many business appraisals have a statement in them saying such as "the value of this business is assumed to be 2 times the earnings." Standards allow for allow patchwork methodology, using different methods and assumptions that are inconsistent with each other, in the same valuation. I have also seen appraisers doing a damage analysis comparing a sale amount to a fair market value, and state that they assumed these would be comparable. Studies have shown very poor if not negative correlations between sales values and fair market values. Standards are not theory.

There are also standards which are simply irrelevant in certain cases. I break all standards requiring the "date of incorporation" to be listed in the appraisal, when I work with companies that have been around for dozens of years and I simply write that the business has been around for dozens of years.

I have difficulty with "verifiable education." I have a Master's degree in Economics and undertook an independent study under one of my professors in studying small business valuations. I spent 12 hard months undertaking this independent study; although I only needed 2 semester hours remaining in order to graduate. I only paid for the 2 semester hours, and the independent study on my official transcript is titled "Special Topics and Discussion." I really don't know how I could ever verify my education.

I had spent years performing forensic economic damage evaluations, including those relating to business profits (but not business valuations). I was not impressed at all with the professional business valuations I saw. They all lacked the theory it takes to guide their actions. In school, I found that there was only one complete theory for business valuations, which was based on economic profits (EVA and MVA by Stern Stewart & Co), which is really an advancement on the IRS's "formula" method. The Asset method's theory is simple "assets relate to value" and the Income method's theory is simply "income relates to value" and the Market approaches make the big mistake of assuming businesses (especially small businesses) are comparable to each other and only one aspect of these businesses are relevant.

Business appraisal certifications are worthless if the appraiser doesn't have any theory to guide their work and keep their methods internally consistent. Anyway, "certifications" are relevant for marketing purposes, whereas "licenses" are relevant for regulation. There's no such thing as a business valuation license.

To me, theory is more important than standards. To me, knowledge in theory is more important than certifications. Experience in dealing with business financials should be relevant experience for performing business valuations.