Valuation report notes are narratives and observations you’ve gathered as you put your work together.

I review many valuation reports for my valuation practice, both for the ISBA and potential clients. I’ve seen a lot of different styles of reports, from one that included 300 plus pages of data that had no bearing on anything necessary to the actual assignment to a report writing that consists of a few pages of numbers used in mathematical calculations and quite a few different styles in between.

Case in Point

Recently, a client provided me a copy of a report his CPA performed. The information was meant to help my client transfer his ownership interest to his son. My client asked me to review what he felt was a wide discrepancy between the CPA’s report and what his son offered to pay. My assignment: Find anything that will be helpful for my client.

The CPA’s report was one of those that just showed numbers and did the math to provide a value conclusion. There were two calculations, each with a slightly different risk rate. What struck me first was the magnitude of the discount rates used.

The CPA used 5.5% as a discount rate on one set and 7.5% on the other. I just pulled rates from BVR’s Cost of Capital Professional study using an effective date of December 31, 2021, and without a specific company risk premium, the total rate is 13.41%.

Without any narrative explaining the CPA’s thought process, all I can go on is my judgment and experience. In this profession, I have never run into a privately held business that I considered less risky than an investment in a diversified portfolio of publicly traded stocks.

I know that the results of the build-up method do not represent such a portfolio. 

However:

IF one could create such a portfolio investment on the entirety of the S&P 500, would it be unreasonable to expect an annual ROI of approximately 8% out of it?

Based on that series of thoughts, I advised my client that it was likely that his CPA had overvalued his business. My client told me he would go back to his CPA to get the explanation behind those rates.

Why did I share that with you? What does any of that have to do with the reasons for report writing?

Each appraiser communicates their opinion of value to their client in their way. In some instances, some clients do not want to pay for the time it would take to write such a report. Other Appraisers have been known to provide quick schedules, cash the check, and then move on to the next assignment. 

These appraisers may have failed to consider: These types of reports will suck up additional time anyway.

Things to Consider

The client will have questions or take the report writing to another appraiser for a second opinion. When this happens, the second appraiser may have questions. (I am not the only appraiser offering a free review of another’s work.) 

A lender may also have questions, so may the underwriter, and eventually, even any potential buyer/investor, will have some questions.

Once we release a report to the client, that client may show it to anyone they wish regardless of any limitations we attempt to place on its distribution. In their engagement agreements, I know appraisers state that they will not discuss any report writing with anyone who is not their original client.

Well, guess what? That client can simply be the mouthpiece for whoever is asking the questions. The result is a weird 3-way conversation that will take even more time.

General Guidelines in Valuation Report Notes and Narratives

• Be accurate – You may only get one pass at writing your observations. Make it count.
• Be organized – Taking accurate notes while actively writing the appraisal can be difficult. Consider planning how you will document your observations.
• Be descriptive – Use descriptive words to document what you observe. Supply yourself with enough factual evidence that you don’t make assumptions about what you meant when you revisit your notes later.

Recommendation

Writing a short narrative and including valuation report notes on key assumptions helps me avoid most of the unpaid work/discussions/questions surrounding such reports. The narrative is especially beneficial when the client comes back later and asks for an update. The proactive extra step of the added information in the report allows me to give such an update more quickly — for a second fee, of course.

Anticipate that these little projects are often not as easy as you hope. Usually, a quick, small fee for “easy” work turns into a much larger headache down the road.

I am not advocating appraisers turn down these projects, just take them with open eyes and realize that you may be working for free on these projects multiple times later on. Also, remember that writing out your thought process is still not a guaranteed method of avoiding follow-up questions.

Reflections

Your valuation report notes may even include some “personal reflections.” These may consist of observations noteworthy enough to impact your valuation report. What felt comfortable for you, and what felt uncomfortable? While this is vital information, be especially careful to separate it from the final analysis.

Still, in my experience, it has been quite nice to point out to my client that I had already answered most of their questions in the written report.

ISBA Recommends:

• Why Do A Report Writing?
• The Reconciliation and Final Value Conclusion
• Valuing a Small Business in Its Startup Phase
• What Does a Business Appraisal Cost?
• What Does the Business Appraisal Process Look Like?
• Can’t You Just Give Me a Quick Number?
• Social Networking
• A Business is Only Worth What Someone Would Pay for It!

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