What are the Appraisal Standards For Business Appraisers?

What are the Appraisal Standards For Business Appraisers?

 By:  Jeffrey D. Jones, ASA, CBA, CBI

When the value of a business is needed to verify its market value, who do you hire to conduct the appraisal and prepare the report?  While bankers, business advisors, accountants, and sometimes family friends sometimes think they are qualified to conduct business appraisals, without the proper credentials, their opinion of value would not stand up in the event the report is needed for court or for tax purposes.  People who have the professional knowledge to conduct business appraisals typically have a strong background in finance which is a separate discipline from accounting.  While  business appraisers must have an understanding of accounting procedures, they do not need to be accountants. 

Business appraisers must be independent of their client and not become an advocate for their client.  Most people who conduct business appraisals for a living belong to one or more professional business appraisal organizations wherein they have obtained a professional designation after taking specialized appraisal courses, passed an extensive exam, and have their appraisal reports reviewed by a review committee. 

Business appraisers are not required to be licensed by any state or federal agencies.  This is in part due to there having been minimal litigation involving business appraisers’ purposeful wrong doings.  However, business appraisers are subject to state administrative and civil law, as well as professional codes of ethics and practice standards promulgated by the quasi-federal governmental agency known as the Appraisal Foundation through its Uniform Standards of Professional Appraisal Practice (USPAP), and the professional business valuation associations.

All states have administrative laws that governing canons of professional ethics and conduct of professionals such as attorneys, accountants, doctors, and appraisers.  These canons include: 

1. Fidelity Canon – The professional owes a fiduciary responsibility to the client and must treat other parties to a transaction fairly.
2. Integrity Canon – The professional must avoid misrepresentation by words, deeds, or omissions, and should use prudence and caution
3. Competency Canon – Obligates the professional to be knowledgeable and educated about business and market conditions. The professional must exercise judgment and skill while performing duties. 
4. Discriminatory Practices Canon – Requires the professional to not inquire about or make a disclosure that indicates a preference, limitation, or discrimination based on race, color, religion, sex, national origin, ancestry, or familial or handicap status.
5. Posting Consumer Information Canon – Deals with the requirement to post consumer information about the methods disgruntled consumers can use to file a complaint with the regulatory body that regulates the professional.

 The Uniform Standards of Professional Appraisal Practice are federal standards required to be followed by licensed state real estate appraisers and recommended as minimal best practice standards for other appraisal disciplines that include personal property appraisers, machinery & equipment appraisers, and business appraisers.  USPAP Standards 9 and 10 are specific to business appraisers when conducting and reporting business valuations. 

There are several national appraisal organizations that promulgate codes of ethics and practice standards for their business appraiser members.  These organizations include: The American Society of Appraisers, The Institute of Business Appraisers, The National Association of Certified Valuation Analysts, and the American Institute of Certified Public Accountants. 

The code of ethics typically cover many of the same issues addressed in administrative and civil law and are usually mandatory for the appraisal societies’ members to follows.  These issues include the appraiser’s primary duty and responsibilities, obligation to his client, obligation to other appraisers and parties to a transaction, and unethical and unprofessional appraisal practices. 

Practice standards are usually guidelines that outline best practices recommendations for appraisers to follow.  Standards address issues that are specific to the appraisal profession and include procedures for developing a business valuation; criteria for making financial statement adjustments; procedures for applying valuation methods; procedures for correlation of indications of value; instructions on how to handle discounts for marketability, lack of control, and other issues; and recommended content for appraisal reports. 

The American Society of Appraisers is one of the oldest appraisal organizations that provide professional designations for business appraisers.  This organization has a comprehensive code of ethics required of its members.  Their business valuation discipline established the first practice standards in the world through its Standards Committee.  I served on this committee for 12 years.  These standards have become the corner stone for USPAP 9 & 10, as well as the standards developed by the other business appraisal organizations.  The ASA code of ethics and practice standards can be obtained at the ASA website www.appraisers.org. 

When hiring a business appraiser, look for persons who have business appraisal professional designations, can be deemed independent, and who have experience in appraising businesses similar to the subject business. 

Jeff Jones, is President of Advanced Business Brokers, Inc. and Certified Appraisers, Inc. 10500 Northwest Frwy., Suite 200, Houston, TX  77092  713-401-9110, [email protected],  www.advancedbb.com.