A business valuation comprises the gathering and analysis of information, application of valuation methodologies and applied judgment to reach a valuation opinion.
An appraisal review examines the credibility of the valuation product, examining information in the report and the methodologies applied. In other words, an appraisal review is not an opinion about the value, but an opinion about the process the appraiser used to reach the opinion.
If a report fails to disclose sufficient information, displays gaps in analytical conclusions or misapplies valuation methodology, the report may be found to lack credibility.
When is an appraisal review appropriate?
Litigation: An appraisal review is an effective tool for identifying weakness in reports for settlement purposes; or in the course of litigation to pinpoint which factors cause opposing conclusions to diverge, allowing parties to anticipate the court’s reaction.
Buy-Sell Agreements: Appraisal reviews are sought for second opinions on values established as a basis for negotiations or impending liquidation events.
Trustee or fiduciary due diligence regarding valuation reports such an ESOP trustee. The trustee may hire the business valuation firm to value the stock, but the valuation is a tool he or she uses to determine the value – the responsiblity (and the liability that goes with it) falls on the ESOP trustee. Since most trustees are not experts in valuing closely-held stock, it can be difficult to fulfil these responsiblities without an independent review of the valuation.