Business appraisals can be a significant expense for clients, especially since these reports are generally requested when a decision involving large amounts of dollars is imminent. Saving money is not necessarily a bad thing, and I like to be able to help out where I can, but it’s not as easy as a quick number.
Every so often a client will call me up and ask me for a “very basic” valuation of a privately held business. I will be told something like the following: “You don’t need to do all the analysis or even run through most of the calculations. Just give me a quick number as quick as you can.”
I am not strictly opposed to working on these types of projects where the client wants as many corners cut as possible. What I am opposed to, is the client then taking my report and calling it an appraisal or a valuation when it most certainly is not.
(USPAP allows for two types of reports, an Appraisal Report or a Restricted Appraisal Report and each version have certain requirements described that an appraiser must include.)
My concern is for my personal reputation when that client, who typically will also promise me loads of future work (if I would just help out this once) takes this very limited “Rough Estimate” quick number report and then attempts to use it as if it were an actual appraisal. Any report I sign and send out of my office, is now out of my control and anyone can see it, depending on what the client does with it.
To combat this, I refer to these types of projects as “Rough Estimates”, and not any sort of appraisal. In fact, I will specifically state in the report in several locations that this is not an appraisal and is only a rough estimate based on very limited data and research.
I will also have the client sign an engagement agreement where I specifically list the limitations requested by that client, and I state that I am being engaged to provide a Rough Estimate of value and not a business appraisal and that the Rough Estimate’s conclusion could be materially different should an actual appraisal be completed. I also state what the increased fee would be should the client come back and request that Rough Estimate be turned into a real conclusion of value.
Interestingly enough, of the few times I have been requested to provide a report like this, once I explain exactly under what circumstances I would be willing to do so, and I point out that the conclusion of a Rough Estimate would be a range of potential values, I tend to not hear back from that client again.
There have been a couple of clients who still requested I complete the Rough Estimate, and some of them came back and asked if I could tighten up that range I provided and perhaps even provide just a single value conclusion…I reply with, “Sure! I could just perform an actual appraisal for you. The fee for that is in our engagement agreement and I’ll provide an updated document request list.”
As business appraisers, our currency is our unbiased, impartial, third-party expert opinion. This is why clients come to us and ask us to do this work. We are also people trying to earn a good living for ourselves and our families, so turning down work is always a very hard thing to do.
However, when that small job has the potential to come back in the future and bite us in our figurative rear-ends, and we have to defend why we are charging several thousand dollars for a valuation for litigation purposes when “my next-door neighbor had a report you did for him for $500 bucks?”
“Why do you need to see my tax returns? You only asked for a QuickBooks report for that other report?”
“What do you mean this assignment will take six weeks? You did that last one in two days.”
It is always a good idea to be able to explain what the differences are and why those limitations exist. I try to couch the differences in phrases that relate the work we do to theirs. When talking to an auto mechanic, “Do we really need all four motor mounts in the engine compartment? Why not just use one, isn’t it cheaper?”
When the client works in finance, “Why get a credit report on each client? Can’t you just make loans only checking credit on every 12th client or so?”
When the client works in construction, “Why include all that rebar in the foundation? Isn’t the cement hard enough by itself?”
It is our education, training, and experience that makes us valuable as business appraisers. When we sign a report and state our opinion as to what the value of a business is, that report comes with a copy of our Professional Qualifications so any reader can judge the potential quality of that report.
So, even if we are working on a Rough Estimate or an actual valuation following all the logic and practices we know are important, make sure that report looks good and it tells the reader exactly what it is doing and why. I’m happy to be paid for my work and my opinions, but the client needs to know why a more expensive report may be necessary and not just a quick number.
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