In Business Valuation, How Does One Judge an Opinion?
By Shawn M. Hyde
One of the very first industries that incorporated the word “appraisal” and described its function was the real estate industry. If one reads in the 6th edition of The Dictionary of Real Estate Appraisal, it defines an appraisal as “The act or process of developing an opinion of value; an opinion of value”.
Business valuations are also exactly that; our opinion as to the value of what we are appraising. We have a process we follow in order to develop our value conclusion of the subject ownership interest we have been asked to appraise.
1. What happens when we are asked to review another appraiser’s work?
I was told once, that the purpose of reviewing another appraiser’s report in a litigation setting is to completely discredit the other expert’s work. I totally disagree! I believe the purpose of reviewing another appraiser’s report is the same regardless of the reason why I have been asked to do so.
When I review a report, I try to understand what the other appraiser’s thought process was. I look for the support provided for the stated assumptions. I look for the reasons why certain choices were made. If I see areas that are inconsistent with others in the report, I flag those and ask the question, “why?” If I see math errors or incorrect application of basic appraisal theory, I will flag those as well, but no one is perfect. We have all made mistakes and when they are found, I believe we should be able to correct them.
The purpose of an appraisal review is to make sure the conclusion of value is reasonable, and if it isn’t, to explain why it is not reasonable.
2. Is that appraiser’s opinion somehow ‘wrong’ if it differs from our own?
I don’t have to agree with anything I see in another appraiser’s report, but unless I have been hired to write my own report, I am not required to share what my opinion of value is.
The other expert’s opinion is just as valid as my own. I watch the process the other appraiser used, the steps that were taken, the choices that were made, the data that was analyzed, and how all of those items impacted the value conclusion. I don’t have to agree with the conclusions, but I do have to be able to understand how those conclusions were drawn.
3. How do we communicate the results of our review to our client?
The answer here is, “It depends.” If I am reviewing a report for demonstration purposes, or to assist another appraiser before the report is delivered to a client or some other similar purpose, an informal process makes sense. I will insert my questions and comments in the document itself at the appropriate places, and send it back to the appraiser.
If I have been formally engaged to write a report on my review, then I need to make sure that I follow all the steps described in USPAP Standard 3. I will still insert my questions and comments as part of my review process, but the document I provide at the end will be my Review Report, and not the original report document with my notes inserted.
4. Occasionally, I am asked to review the review another expert conducted on my own report. How do I respond to that?
I believe it is important to remain an independent, third-party appraiser in all my engagements. If I were to become an advocate for my client, and not for my own opinion, I would write a review that showed my advocacy. I would do what that other appraiser told me, not that many years ago.
When I receive a review of my own work, I look at it as dispassionately as I can. What tone did the other reviewer take? Is the review written by an advocate for the other side, or was it written by a professional who understands that every appraiser’s opinion is different and that we don’t always get access to the same level of information? I look at the points raised and see if they make sense. Did I not provide sufficient analysis to explain my position and opinion or is the other reviewer simply highlighting the areas where our opinions differ? Did I make an error or did the reviewer misunderstand something?
At the end of the day, each appraisal is an explanation of how the appraiser arrived at each value conclusion and any differences of opinion are exactly that. Errors are one thing and they should be corrected, but opinions are just opinions, and no one’s opinion can truly be considered wrong. Keep that in mind the next time you are asked to review another appraiser’s report.
By Shawn M. Hyde