Multidisciplinary valuation can be highly rewarding but can also be quite mysterious. Regardless, the public needs cross disciplinary work and does not care whether a problem belongs in business valuation or real property appraisal, for example. They simply want a conclusion that is well supported and defensible. The author shares the benefits and risks providing multidisciplinary valuations.
Multidisciplinary valuation is one of the most promising and most potentially hazardous specialties of professional valuation practice. It can be highly rewarding but can also be quite mysterious. Its many possibilities also contain traps for the unwary. Regardless, the public needs cross‑disciplinary work and does not care whether a problem belongs in business valuation or real property appraisal, for example. They simply want a conclusion that is well supported and defensible.
Lots of interesting valuation projects live in mixed territory:
- Blockage discounts (personal property collections);
- Tangible/intangible value separation (real estate component of an operating business);
- Going concern value component of (mostly) real estate assets (hotels, car washes, convenience stores, and others);
- Partnerships and LLCs holding real estate assets; and
- Common tenancy ownership of real estate assets (this includes single family residences).
So easy peasy, right? The business valuer/consultant hires the appropriate asset appraiser, they each do their bit, and it is done. Not so fast. The glib, easy version can generate blind spots that can turn the valuation into a serious liability. Doesn’t look that way at first, though, because blind spots have not yet been seen. They may be held up by the opposing expert, IRS, or any user that can see at least some. But then it is too late. Risk can be reduced or avoided entirely, but only if the blind spots are first understood and acknowledged. Here is why.
Long Experience Means Something
The primary source of valuation expertise is—ironically—also the primary source of blind spots. To understand what is required for multidisciplinary practice, we must first reflect on what is required for professional practice generally. A very condensed summary is the following:
Valuation practice is about asking the right questions,
which we all do based on our own training and experience
…but also knowing what we do not know
That last part comes from long experience, as any valuer will attest. “I don’t know everything about the disciplines for which I am qualified, but I almost always can recognize when the proposed assignment has conditions or circumstances for which I don’t know enough to proceed. Now I can take steps to rectify the problem or decline the assignment. But I am confident that I can recognize what is needed.” Experience over, say 25 or more years, will do that.
But if the valuer is considering an assignment that requires knowledge of a field in which he or she is not qualified nor experienced, they face a different dilemma:
Multidisciplinary valuation is about asking the right questions
for which we do not have the necessary training and experience
…and not knowing what we do not know
This is a big deal. Multidisciplinary assignments change the equation. The questions that matter are no longer drawn from a single, well-experienced body of knowledge. The boundary between disciplines creates an entirely new situation. In that setting, even very experienced practitioners can find themselves relying on assumptions that make perfect sense within their own discipline but create trouble the moment another discipline enters the picture. Not seeing the gaps creates blind spots in the first place, and blind spots can destroy the integrity of the valuation. That is not a joke. It happens all the time, and with real consequences.
The problem is not impossible, and eventually not even all that difficult. It exists because multidisciplinary practice occupies the space between the established disciplines, and the professions have not yet fully developed the bodies of knowledge that these assignments require. The extent of the problem depends on the nature of the combinations, which range from manageable and already solved to quite difficult. We can divide the practice into three basic circumstances.
Type I Applications
Type 1 can be practiced within one discipline, when scope of the problem is limited. Such applications include:
- Special-use properties (real property), such as carwashes, convenience stores, petrol stations, hotels, golf courses, restaurants, auto dealerships, billboards, hospitals, and more. One practitioner adds to existing practice, with expert help from publications and trainings. Often referenced as “going concern value.”
- Industry specialties (business valuation), such as construction companies, early stage companies, insurance agencies, healthcare businesses, etc. Business valuers often specialize in these industries as specialty niches.
The applicable body of knowledge comes about because practitioners with long experience in the niche industry or specialty area write books and/or teach seminars for others who want to take on that type of work. Those students can then practice in their new specialty until they know the right questions to ask and eventually know what they do not know in this particular niche. We have been doing this for a long time. This process works.
Type II Applications
Type II requires major contributions from more than one discipline, which makes its scope greater than for Type I. The key difference is “major contributions” which are not readily learned without extensive practice in the specific disciplines involved. This does not necessarily mean that professional designation in all affected disciplines is required, but it does mean that the pool of fundamentally qualified practitioners is small. These types of applications include:
- Partnerships and LLCs holding real estate assets;
- Other, deeded/fractional interests in real estate, fine art, or gems; and
- Tokenized interests in any asset, a new trend and a potentially huge number of interests.
These applications are not merely “a little bit of real property appraisal” and “a little bit of business valuation.” They create circumstances that problems arise only because of the combination. Ownership structure, control, marketability, partition risk, legal context, and the underlying asset all matter, and none of those elements can be handled properly by assuming that one discipline’s answers will plug neatly into another.
For these assignments, casual collaboration is not enough. This practice needs a defined process; a framework that sets out the questions to be asked, assumptions to be tested, particularly where blind spots are likely to appear. When the scope of the problem is defined clearly, many blind spots can be reduced or eliminated by following a coherent method. Without that discipline, even capable practitioners can produce work that is harder to defend than it should be.
I would not be identifying this as a problem unless I believed a solution could be fashioned. The goal is to have multidisciplinary practitioners know the right questions to ask and know what they do not know. This is achievable, but not by acquiring multiple designations and long practice in multiple fields, fortunately. There is a simple workaround, along the lines of the Type I solutions.
As long as the problem’s scope can be well-enough defined (and it can for the above bulleted applications), it can be solved by creating a comprehensive checklist with the right questions; one that also shines light into those blind spots. As long as the practitioner is well-qualified in a primary discipline, then they can use such guidance to collaborate with the other practitioner, and be fully competent for that specific case and every subsequent case. Heavy experience is just not needed.
Type III Applications
This type of multidisciplinary application is simply difficult, both because there is great variation in the objectives of the valuation, and because (at least for the time being) appraisers in multiple disciplines are needed. There is no easy way around it. Type III applications mostly involve large industrial or commercial facilities operated as a going concern: scrap metal processing, mixed-use truck stop, boat harbor, airports, sporting arenas, and many others. The objective is to allocate value between assets, typically real estate and other business assets. The typical characteristic of such ‘special use’ facilities is that their assets rarely, if ever, transfer separately from the business entity that operates them as an assemblage. Value must be extracted from the overall business operation. Collaboration between disciplines is very necessary, but blind spots are still guaranteed.
Since the application is so broad, multidisciplinary guidance comes in the form of process, not as a prescribed set of the right questions to ask. There is too much involved. And unlike Type I applications, the business valuation is far too demanding for it to be picked up by the asset appraiser.
This is the one multidisciplinary instance where the guiding process needs to be developed by valuers who have relevant expertise from the different specialties. An important effort at process guidance was published by The Appraisal Foundation as Appraisal Practices Board VFR Valuation Advisory 2: The Valuation of Customer-Related Assets (TAF, June 2016). While the publication is intended for financial reporting, it does include guidance for using the multi-period excess earnings method (MPEEM), which is the core methodology for such applications.
These applications usually involve large entities, and large consequences; most often needed for eminent domain, income, and property taxation. Collaboration is the key to success.
Professional Development Goals
The public does not register meaningful distinctions between our defined disciplines. They simply have valuation requirements and need expert help. The more wide-ranging a practitioner’s capabilities, the better its clients will be served. Plus, many multidisciplinary practices are enduring and pay better than either of the component practices.
For example, we are familiar with partnership valuation for tax purposes, and while real estate has always been amenable to partnership formation, the past 20+ years have seen the formation of an astronomically huge number of family partnerships. The deed is done, and those partnerships are not going away. Their fortunes are affected strongly by generational changes, meaning that successor generations have a strong potential for conflict. Regardless of congressional tinkering with tax statures, the demand for consultation and experts for intra-family court actions has been increasing, and will only continue to do so.
There is no reason a professional valuation practice cannot offer these specialty services. They are often enduring, valuable to the public, and professionally rewarding. The opportunity is real. The blind spots are real too. To grasp the opportunity, we must deal honestly with the blind spots.
Dennis A. Webb, ASA, MAI, FRICS, is a designated business valuer and real estate appraiser, former syndicator and engineer. He is the principal of Primus Valuations, a multidisciplinary valuation firm with a practice emphasis on real property-related business interests, the enterprise value associated with special-use properties, personal property blockage discounts, and other mixed-discipline applications. Mr. Webb has been speaking and writing for 30 years, an effort which has resulted in a large body of articles, presentations, and ongoing seminars for valuation professionals, lawyers, and property owners. His most recent major work is the definitive “Valuing Fractional Interests in Real Estate 2.0,” a complete upgrade of the valuation process for LLC, partnership, and common tenancy interests. NACVA describes it as “…the only book that combines real property appraisal and business valuation discipline technologies into one cohesive methodology.” You will find the book in the NACVA library. His emphasis has always been on “engineering” valuation methodology and bringing analysis/data crunching together with persuasive storytelling. A native of Los Angeles, he now lives in Denver, Colorado, and enjoys writing, hiking, traveling, and dancing Argentine Tango (not necessarily in that order).
Mr. Webb can be contacted at (303) 910-9755 or by e-mail to dwebb@primusvaluations.net.
