Business valuation standard

From Wikipedia, the free 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), the Institute of Business Appraisers (IBA), 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.[1] The ASA's standards are published, for example, as the ASA Business Valuation Standards.

Contents

[edit] Business Value Standard

A closely related term is the Business Value Standard which defines the measure of value[2] used in business valuation. A number of business value standards are commonly used in appraising the value of businesses and professional practices, with fair market value being perhaps the best known.

[edit] Features

All of the standards have the following in common:[1]

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.

[edit] 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"[3]
 Please help improve this article or section by expanding it.
Further information might be found on the talk page or at requests for expansion. (July 2007)

[edit] References

  1. ^ a b D. Larry Crumbley, G. Stevenson Smith, and Lester E. Heitger (2003-01-01). Forensic and Investigative Accounting. CCH Tax and Accounting, 5-33–5-35. ISBN 0-8080-1001-8. 
  2. ^ Common Standards of Business Value
  3. ^ Robert F. Reilly and Robert P. Schweihs (1999-09-01). The Handbook of Advanced Business Valuation. McGraw-Hill Professional, 100. ISBN 0-07-134769-0. 

[edit] Further reading

  • Bill Sipes (2006). 2006 Business Valuation Sourcebook. CCH Tax and Accounting, ¶5011–¶5021. ISBN 0-8080-1355-6.  — the full text of the ASA Business Valuation Standards, IBA Business Appraisal Standards, IBA Code of Ethics, IBA Business Valuation Guidelines, and NACVA Professional Standards