Business valuation standard
Encyclopedia
Business Valuation Standards (BVS) are codes of practice that are used in business valuation
. Each of the three major United States valuation societies — the American Society of Appraisers
(ASA), American Institute of Certified Public Accountants (CPA/ABV), and the National Association of Certified Valuation Analysts (NACVA) — has its own set of Business Valuation Standards, which it requires all of its accredited members to adhere to. The AICPA's standards are published as Statement on Standards for Valuation Services No.1 and the ASA's standards are published as the ASA Business Valuation Standards. All AICPA members are required to follow SSVS1. Additionally, the majority of the State Accountancy Boards have adopted SSVS1 for CPAs licensed in their state.
Criticism of the abovementioned organizations are as follows:
1) These are neither the major valuation societies, nor are they the only valuation societies. They are however, organizations which engage in considerable self-promotion among their members to foster the delusion among their members, that by the mere fact of membership, their members are more qualified to perform business appraisal than non-members.
2) These are all privately held organizations, in which membership is voluntary.
3) There are no regulations mandating that one must belong to any of these organizations in order to practice as a business appraiser.
4) In that these are voluntary membership organizations, their standards have little or no weight with either the business valuation community at large or with the legal and judicial community who appraisers often serve.
5) The standards and ethics of these organizations are constructed to be vague and self-serving, with numerous exceptions, designed more to excuse conflicts of interest, membership poor performance and unsupported opinion, than to encourage, independence, scientific analysis and high quality work. Conflicts of interest are a problem, particularly among CPA/Appraisers, who regularly join these organizations so that they can offer valuation services to their existing accounting clients, in violation of independence rules and ethics.
6) The education which these organizations offer is unaccredited and of low quality, in that it does not reach the threshold level of education in finance of an accredited university.
7) Educational standards have to be kept low to attract new members and membership dues.
8) The credentials which these organizations issue are often issued for reasons of favoritism and cronyism over merit.
9) The purpose of these organizations is often tarnished by the politics of a few active, insider members who consider themselves more entitled then other members, and consequently use the organization resources to further their own self-interests over the interests of the membership at large.
10) There is no accounting of the membership dues paid into these membership organizations. Consequently, members do not know where, to whom, or on what their dues money is spent.
a requirement of independence:The appraiser must not act in favor of the client or any other party.
a requirement that fees be not contingent on appraised value:Fees based upon, for example, a percentage of the valuation are unethical and are not allowed.
a requirement that all limiting conditions be explicitly stated:The reader must be informed of all assumptions made as part of the valuation. For example, if a lawsuit is pending against a business, the valuation must explicitly state that the impact of the outcome of the lawsuit will have an unknown effect on the value, and what assumptions about the outcome have or have not been made.
a requirement that all people participating in the valuation be disclosed:All professionals participating in a valuation report must sign it, and must have certification of their independence, fee arrangements, and other factors.
a requirement that all information sources be stated:Readers must be able to replicate valuation reports for themselves. Therefore, all sources used in compiling the report must be stated.
minimum requirements for contents of reports:The precise minimum requirements vary from society to society, but roughly they include the purpose and scope of the assignment, the standard of value and specific valuation date being employed, an identification of the specific interest being evaluated, the relevant state and federal laws that govern the entity being valued, the scope of the procedures employed during valuation, the nature and history of the business, the historical financial information on the business, a thorough financial analysis of the business comparing the business' performance with industry trends, an overview of the industry in which the business operates and the impact of market conditions on the business, and the current investment climate.
marketability discount:In the ASA BVS a marketability discount is "an amount or percentage deducted from an equity interest to reflect lack of marketability"
Business valuation
Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business...
. Each of the three major United States valuation societies — the American Society of Appraisers
American Society of Appraisers
The American Society of Appraisers is a multi-discipline non-profit international organization of professional appraisers . Founded in 1936, the mission of the Society is to foster the public trust of our members and the appraisal profession through compliance with the highest levels of ethical...
(ASA), American Institute of Certified Public Accountants (CPA/ABV), and the National Association of Certified Valuation Analysts (NACVA) — has its own set of Business Valuation Standards, which it requires all of its accredited members to adhere to. The AICPA's standards are published as Statement on Standards for Valuation Services No.1 and the ASA's standards are published as the ASA Business Valuation Standards. All AICPA members are required to follow SSVS1. Additionally, the majority of the State Accountancy Boards have adopted SSVS1 for CPAs licensed in their state.
Criticism of the abovementioned organizations are as follows:
1) These are neither the major valuation societies, nor are they the only valuation societies. They are however, organizations which engage in considerable self-promotion among their members to foster the delusion among their members, that by the mere fact of membership, their members are more qualified to perform business appraisal than non-members.
2) These are all privately held organizations, in which membership is voluntary.
3) There are no regulations mandating that one must belong to any of these organizations in order to practice as a business appraiser.
4) In that these are voluntary membership organizations, their standards have little or no weight with either the business valuation community at large or with the legal and judicial community who appraisers often serve.
5) The standards and ethics of these organizations are constructed to be vague and self-serving, with numerous exceptions, designed more to excuse conflicts of interest, membership poor performance and unsupported opinion, than to encourage, independence, scientific analysis and high quality work. Conflicts of interest are a problem, particularly among CPA/Appraisers, who regularly join these organizations so that they can offer valuation services to their existing accounting clients, in violation of independence rules and ethics.
6) The education which these organizations offer is unaccredited and of low quality, in that it does not reach the threshold level of education in finance of an accredited university.
7) Educational standards have to be kept low to attract new members and membership dues.
8) The credentials which these organizations issue are often issued for reasons of favoritism and cronyism over merit.
9) The purpose of these organizations is often tarnished by the politics of a few active, insider members who consider themselves more entitled then other members, and consequently use the organization resources to further their own self-interests over the interests of the membership at large.
10) There is no accounting of the membership dues paid into these membership organizations. Consequently, members do not know where, to whom, or on what their dues money is spent.
Features
All of the standards have the following in common:a requirement of independence:The appraiser must not act in favor of the client or any other party.
a requirement that fees be not contingent on appraised value:Fees based upon, for example, a percentage of the valuation are unethical and are not allowed.
a requirement that all limiting conditions be explicitly stated:The reader must be informed of all assumptions made as part of the valuation. For example, if a lawsuit is pending against a business, the valuation must explicitly state that the impact of the outcome of the lawsuit will have an unknown effect on the value, and what assumptions about the outcome have or have not been made.
a requirement that all people participating in the valuation be disclosed:All professionals participating in a valuation report must sign it, and must have certification of their independence, fee arrangements, and other factors.
a requirement that all information sources be stated:Readers must be able to replicate valuation reports for themselves. Therefore, all sources used in compiling the report must be stated.
minimum requirements for contents of reports:The precise minimum requirements vary from society to society, but roughly they include the purpose and scope of the assignment, the standard of value and specific valuation date being employed, an identification of the specific interest being evaluated, the relevant state and federal laws that govern the entity being valued, the scope of the procedures employed during valuation, the nature and history of the business, the historical financial information on the business, a thorough financial analysis of the business comparing the business' performance with industry trends, an overview of the industry in which the business operates and the impact of market conditions on the business, and the current investment climate.
Concepts employed
This is a list of some of the common concepts employed in business valuation that are defined by business valuation standards.marketability discount:In the ASA BVS a marketability discount is "an amount or percentage deducted from an equity interest to reflect lack of marketability"