FREE online courses on Mergers & Acquisitions - Chapter 4 - Valuation Standards

 

Before we get into the valuation calculation, we should recognize valuation standards. Most of us are reasonably aware that Generally Accepted Accounting Principles (GAAP) are used as standards to guide the preparation of financial statements. When we calculate the value (appraisal) of a company, there is a set of standards known as "Uniform Standards of Professional Appraisal Practice" or USAAP. USAAP's are issued by the Appraisals Standards Board. Here are some examples:

 

To avoid misuse or misunderstanding when Discounted Cash Flow (DCF) analysis is used in an appraisal assignment to estimate market value, it is the responsibility of the appraiser to ensure that the controlling input is consistent with market evidence and prevailing attitudes. Market value DCF analysis should be supported by market derived data, and the assumptions should be both market and property specific. Market value DCF analysis is intended to reflect the expectations and perceptions of market participants along with available factual data.

 

In developing a real property appraisal, an appraiser must: (a) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a creditable appraisal; (b) not commit a substantial error of omission or co-omission that significantly affects an appraisal; (c) not render appraisal services in a careless or negligent manner, such as a series of errors that considered individually may not significantly affect the result of an appraisal, but which when considered in aggregate would be misleading.

 

Another area that can create some confusion is the definition of market value. This is particularly important where the Target Company is private (no market exists). People involved in the valuation process sometimes refer to IRS Revenue Ruling 59-60 which defines market value as:

 

The price at which the property could change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

 

A final point about valuation standards concerns professional certification. Two programs directly related to valuations are Certified Valuation Analyst (CVA) and Accredited in Business Valuations (ABV). The CVA is administered by the National Association of CVA's (www.nacva.com) and the ABV is administered by the American Institute of Certified Public Accountants (AICPA - www.aicpa.org). Enlisting people who carry these professional designations is highly recommended.