I review many valuation reports for my valuation practice, both for the ISBA and for potential clients. I\u2019ve 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.<\/p>\n
Recently I was provided with a copy of a report that my client\u2019s CPA performed for him to help my client transfer his ownership interest to my client\u2019s son. My client called me because he saw a wide discrepancy between the CPA\u2019s report and what his son offered to pay. My client asked me to look at the report to see if I could see anything that would be helpful to him.<\/p>\n
This report was one of those that just showed numbers and did the math to provide a value conclusion.\u00a0 There were two sets of calculations, each with a slightly different risk rate.\u00a0 What struck me first was the magnitude of the discount rates that were used.<\/p>\n
The CPA used 5.5% as a discount rate on one set and went up to 7.5% on the other.\u00a0 I just pulled rates from BVR\u2019s Cost of Capital Professional study using an effective date of December 31, 2021, and without<\/em> a specific company risk premium, the total rate is 13.41%.<\/p>\n Without any narrative explaining the CPA\u2019s thought process, all I can go on is my judgment and experience, which tells me that I have never run into a privately held business that I considered to be less risky an investment, then an investment in a diversified portfolio of publicly traded stocks.<\/p>\n I know that the results of the build-up method do not represent such a portfolio, but\u2026IF 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?<\/p>\n So, basing my review on that series of thoughts, I advised my client that it was likely that his CPA had overvalued his business.\u00a0 My client told me he will go back to his CPA to get the explanation behind those rates.<\/p>\n Each appraiser communicates their opinion of value to their client in some form or another. In some instances, some clients simply do not want to pay for the time it would take to write such a report, so certain appraisers have been known to provide quick schedules, cash the check, and then move on to the next assignment. What these appraisers are not considering, is the fact that these types of reports will suck up additional time anyway.<\/p>\n The client will have questions.\u00a0 The client may take the report writing to another appraiser for a second opinion, and that appraiser will have questions. (I am not the only appraiser offering a free review of another\u2019s work.)\u00a0 A lender may have questions, so may the underwriter, and eventually, even any potential buyer\/investor will have some questions.<\/p>\n 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.\u00a0 I know appraisers who state in their engagement agreements that they will not discuss any report writing with anyone who is not their original client.<\/p>\n Well, guess what? That client can simply be the mouthpiece for whoever is asking the questions, so now that appraiser has a weird three-way conversation that will take even more time to get through.<\/p>\n I have found that writing a short narrative and including notes on key assumptions helps avoid most of the unpaid work\/discussions\/questions surrounding such reports. Especially when the client comes back a year or more later and asks for an update. Since I have provided myself with enough information in the report, I can more easily give such an update. (For a second fee, of course.)<\/p>\n These little projects are often not as easy as the appraiser hopes.\u00a0 Often, a quick, small fee for \u201ceasy\u201d work turns into a much larger headache down the road.<\/p>\n 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, please be aware that writing out your thought process is still not a guaranteed method of avoiding follow-up questions.<\/p>\n 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.<\/p>\n","protected":false},"excerpt":{"rendered":" I review many valuation reports for my valuation practice, both […]<\/p>\n","protected":false},"author":18,"featured_media":16135,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36,47],"tags":[],"class_list":["post-16092","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-appraisal","category-report-writing"],"yoast_head":"\nWhy did I share that with you? What does any of that have to do with the reasons for report writing?<\/h5>\n