In the course of litigation, it is not uncommon for a valuation analyst to be asked to assess another analyst’s valuation report, its analysis, and conclusions. This review process is designed to offer stakeholders, judges, or other triers of fact a neutral opinion about the credibility of the valuation report in question.
Both the National Association of Certified Valuation Analysts and the Appraisal Standards Board’s Uniform Standards of Professional Appraisal Practice provide guidance for the valuation review process. In general, this guidance covers the following:
Was the valuation conducted according to applicable professional standards?
The goal is to assess whether the valuation was conducted according to accepted standards covering the stated purpose of the valuation, the standard of value, the valuation date, and generally accepted valuation practices.
The report should identify which professional standards the valuation analyst applied, the type of engagement, and the type of report issued.
Was the valuation analysis complete, accurate, and adequate?
In this area, the reviewer assesses whether the valuation analyst considered all of the facts and circumstances known (or knowable) at the time of the valuation and whether his or her assumptions were logical.
The reviewer also considers the accuracy of the calculations. Does the conclusion reflect computational or math errors or faulty formulas?
Was the analysis relevant and reasonable given the intended use of the opinion and report?
Here the reviewer assesses whether the valuation process resulted in a reasonable, reliable, and objective opinion of value. Were the valuation analyst’s conclusions and opinions appropriate and credible? Did the report identify and include complete and accurate information, discussion, and disclosures to help users understand its conclusions?
A Closer Look
It’s often necessary for the reviewing analyst to conduct his or her own research and analysis. For example, a reviewing analyst will likely dig into certain areas that are open to misinterpretation, such as:
Compensation: Business owners sometimes overpay or underpay themselves. For the purposes of a valuation, executive compensation must be adjusted to reflect market-driven salaries and benefits.
Subsequent events: A valuation report indicates the analyst’s opinion of value at a certain date and should not include facts or knowledge that wouldn’t have been known as of the valuation date. For example, an industry upheaval, market collapse, or natural disaster occurring after the valuation date shouldn’t be reflected in the conclusion of value.
Discounts: When assessing a business interest in a privately held company, discounts for lack of marketability and lack of control should be reflected when appropriate. The valuation analyst must also appropriately interpret public company guideline values relative to the privately held business in question.
Review, Not Redo
Be aware that a valuation review does not include a recalculation of value. While a review can be a smart step in certain circumstances where the credibility of a valuation is in question, a review is not a substitute for a second opinion of value.