Five Key Questions to Determine an Appraisal’s Scope and Fee

Focus is Key to Successful Valuation, Time Management, and Business Growth. Here’s How to Size Up a Project.

Rand Curtiss shares insight on queries that allow appraisers to drill down quickly and determine the proper approach and charge for work. What’s the primary goal of the appraisal? Was the last historical year typical—and are there any major atypical facts or circumstances? Find out if the company is in more than one business, and how it differs from competitors.

When I discuss an engagement with a prospective client, I have found it extraordinarily helpful to ask five questions to help me define the scope of work and quote an appropriate fee. Each one of them represents something I learned through being burned (by failing to ask it and having to do more work than anticipated)!

1. What is the primary goal of the appraisal? Some clients have conflicting goals. In a recent engagement for estate taxation, the client owned minority interests in several businesses. The buy-sell agreements were vague on whether valuation discounts applied, but clearly required redemption of interests (for cash) on death. On the one hand, the estate executor wanted a low value for tax purposes. On the other hand, he wanted a high value for redemption. The same appraisal had to apply for both purposes. I ended up discussing this with the (deceased) client’s attorney. She resolved the issue when she disclosed that the estate was subject to large tax liens that would claim all of the redemption value (even if not discounted), that the estate was too small to be subject to death taxes, and that she would prefer no discounting to avoid any arguments with the IRS. That was fine: absent those facts (i.e. no tax liens, taxable estate), there would have been a major issue.

1. Is the last historical year typical? If for some reason it is not, I will need to make normalizing adjustments in my financial forecast. A simple example occurs when a company had a major capital outlay in the last historical year to (say) add onto its facilities. This probably will not recur (at least for many years).
2. Is the company in more than one business, and if so, does it have divisional financials? If so, I will have to prepare (in effect) multiple financial forecasts, costs of capital, and do more work.
3. Are there major atypical facts and circumstances or contingencies? If so, I may have to prepare and synthesize multiple forecasts to account for different assumptions about them.
4. How does the company differ from its competitors? This gives me insights into the comparative strengths, weaknesses, opportunities, threats (SWOT) analysis and has implications for the forecast and cost of capital.

Rand M. Curtiss, MCBA, FIBA, ASA, CBA, is President of Loveman-Curtiss, Inc. in Cleveland, Ohio.

This article first appeared in the Third Quarter 2012 issue of Business Appraisal Practice (BAP.)