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Scoping an Engagement: Questions to Consider Before Any Appraisal, Part II

Difficulties Sometimes Complicate a Valuation Engagement. Here’s How to Anticipate and Derail Potential Disasters With Solid Upfront Client Conversations

Conversations with clients are critical to ensure both owner and appraiser are in agreement about standards in a final report, the length of time the process will take, what the final report will look like, and how much it costs. In this second installment in a two-part series, Rand Curtiss takes us through common objections prospects challenge appraisers with and suggests savvy responses to each. Be sure to read part one HERE.

This article compiles common questions business appraisers are faced with by clients—and common important questions appraisers should ask clients.  This piece is the second installment in a two-part series.  Read the first article here.  The questions here highlight complexities that arise from time to time and can derail appraisers if they don’t handle them at the outset.  Read on to be prepared!

Answering Client Objections

1. I can earn 12% in the stock market and that certainly has plenty of risk. Why are you using such a high (say 25%) discount rate to value my business?

That is a very perceptive question! The stock market consists of thousands of publicly traded companies and, as such, is fully diversified, whereas your company is in one business and one industry, which naturally makes it riskier. Stock market companies are far larger than yours, which makes yours riskier. Your company has a number of specific risk characteristics that are diversified away when you look at the stock market as a whole. Because risk and return go hand in hand, higher risk means a higher return, thus the higher discount rate.

2. My company is unique. There are no comparables out there.  How can you say there are similar businesses and use them to value mine?

The companies we used are in businesses that buyers would consider to be equally desirable, and that are subject to the same general influences on their performance. Therefore, they are priced and valued similarly.  We also used other approaches (income and asset, if applicable) to value your business and those values reconciled with the market data, confirming its reasonability.

3. I understand that my business is worth a low value for tax purposes, but what is it “really” worth?

What you are asking is what you could sell it for. This is not the same thing as fair market value, which envisions a financial buyer (explain).  There could be a strategic buyer (explain) out there who will pay more for your company because of special business fits. Without knowing who they might be or what their characteristics are, I cannot opine as to what that value might be. That will take some more work, but my recommendation is that you defer this since you are really not going to sell (because you are doing transfers for estate planning purposes).

“Sometimes a client asks: ‘I understand that my business is worth a low value for tax purposes, but what is it “really” worth?’”

4. What’s this discounting (for lack of control and marketability) business—we are all partners; that is unfair, we all bought in on the same basis (This is a partnership buyout and there is no provision in the agreement governing share valuation.).

I see your point, and the problem is that your partnership agreement says nothing about this. This, unfortunately, creates a real mess, because who is to say what is “fair?” As an appraiser, I am not the arbitrator of that, unless you appoint me to that role. All I can say is that in the real world, minority interests are discounted, and there is considerable data backing that up. If you and your partners agree that discounts are to be disregarded, that is fine, and I will appraise accordingly. But that is not my call. If you cannot agree, you may have to slug it out in court, and you will need to retain an attorney.

5. Nobody would buy (or sell) the business for that price.

I understand how you feel, but this appraisal is based on prices actual buyers and sellers negotiated. Every approach and method was based on market data. Your individual opinion, though interesting, is not substantiated.

6. I accept your value, but I have no other assets, my soon–to-be ex-spouse gets everything, and I don’t have the money to buy my ex out.

Thank you, and I empathize with you. This happens frequently. This is something that the attorneys will have to negotiate as part of the settlement; make sure your attorney is aware of it.

7. What’s the highest valuation discount that the Internal Revenue Service (IRS) will surely accept?

Zero percent. Any time you take a discount you must disclose it on your tax return. The IRS may audit and challenge any return, although the smaller the amounts in question, the lower the risk.

8. What about the value of goodwill?

This is included in the value of the business (developed under the Income and Market Approaches). Under the Asset Approach, it is valued separately and added to the total.

9. What about the value of my equipment, etc. (added to an Income or Market Approach value)?

A business is valued either on the basis of what it owns less what it owes or on the basis of the benefits it generates. Assets are valued the same way. Your equipment is essential to generate the sales and profits we used to value the business, and its value is included on that basis. Assets, like extra cash, idle equipment, or the proverbial condominium in Florida, that are not necessary to support operations and generate those benefits, are added to the value.                                            

10. The IRS agent says, “We’ll give you a 20% combined discount on that family limited partnership (FLP) interest” (when you appraised a higher one).         

I am not authorized to negotiate for the client and am not their advocate. I therefore cannot respond to you, except to say that as an independent appraiser I developed and strongly justified my discount in my report. If you have specific questions or challenges about my report, I would be glad to discuss them with you. If you can refute my opinion, I would be interested in discussing that as well.

11. Your counterpart (a qualified, honest, and competent opposing expert) thinks the discount rate is 20%; you came up with 15%. Someone is wrong.

Neither of us. Business appraisal is filled with gray areas, and our two opinions are actually fairly close. Reasonable, competent, and honest men and women can have legitimately different opinions of judgmental matters like this one. My counterpart’s opinion is not unreasonable, but I believe my 15% conclusion is more appropriate because …(explain).

12.  How did you account for fraud  (misrepresentation, accounting  irregularities, and skimmed income, etc.) in your report?

I did not. I am neither a qualified fraud examiner nor an auditor. I clearly disclosed that in writing at the outset of my engagement and was retained on that basis. I relied without independent verification on the data provided to me. If there are questions about its integrity, you will need to discuss them with those who prepared it.  If there are changes as a result of further forensic analysis, I have reserved the right to revise my opinion based thereon and will be happy to do so when provided with new information.

13.  A lawyer says, “Your value is way outside the ranges of what the courts have ruled and as indicated by settlements.”

Court cases and settlements are not probative (constituting proper evidence) for business appraisers because they are not based on actual markets and, in many ways, violate the standard of fair market value (coercion, imperfect information, incomplete disclosure, unique facts and circumstances, imperfectly argued cases, etc.) My appraisal is properly based on market data, which is the only basis that a business appraiser can and should use. Arguments about court cases and settlements are the province of attorneys.

14.  I am afraid of taking the discount you appraised for my FLP interest because it might get audited.  Can’t you just make it lower?

No, that would be dishonest, but I can add a transmittal letter to the appraisal that says you asked me to opine as to the appropriateness of the lower discount and, based on my independent appraisal, which corroborates a higher one, your discount is conservative.

15.  The attorney tells you to cite points of law in your report.

I will be happy to do so on the following non-negotiable basis. I will state in my report that I am not an attorney, but that you, named as such, have instructed me to state the following in quotation marks, and I do so solely at your request and with no opinion of or responsibility for it.


If you have other questions or better responses, please share them with me at, and I will include them in a future article.

This article first appeared in the Spring/Summer 2004 edition of Business Appraisal Practice (BAP), published by the Institute of Business Appraisers (IBA).  For more information, go to

Rand M. Curtiss, FIBA, MCBA, CBA is the President of Loveman-Curtiss, a business appraisal firm located in Shaker Heights, Ohio.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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