In real deals – actual arms-length purchases and sales of business interests between unrelated parties – clients often want “ballpark estimates” of value. I understand and agree with this! Not only that, but I strongly recommend ballpark estimates to them, because they are less expensive, less time-consuming, and more appropriate for real deals for many good reasons:
In real deals, the investment standard of value applies. I probably have no idea of the other party’s attributes (let alone who they might be, if, for example, a business owner is just starting to plan a sale). How can I be more precise than a ballpark estimate?
- Even if I could be, the parties will negotiate price and terms. Sellers will start high, buyers low. What they truly need, and what I can provide, are initial offers in the proverbial ballpark. A full appraisal suggests home plate – where they should end up – not how to get there.
- My client’s counterparty will not simply accept my appraised value (done for my client). Even if I am totally objective, they will not believe it (why should they?) and have their own appraisal done. They still have to negotiate. As I see it, in that case both parties will have bought more than they need (appraisals instead of something less), both will be more dug in, and negotiations may be hindered, not helped.
- An appraisal is an independent and objective value opinion. My client needs help on how to get the best price. That’s consulting, which is non-objective. It is perfectly appropriate to provide non-objective services, as long as you disclose this in your report and / or verbally to all parties.
- I want to build my good reputation, not risk it. If a client thinks I persuaded them to buy more than they needed (an appraisal instead of consulting) and if they do not get the anticipated (appraised) result, then that could be bad for me. I take a long-term view of this: what goes around comes around, and I want people to understand that I will provide what is best for them, not best for me. This is a long-term perspective, and I am here to tell you that it works!
- Windows of opportunity and deadlines for real deals are shorter than those for most tax, litigation, and compliance engagements. (Short windows for any of those may cause me to decline engagements or raise fees considerably. If clients or advisors dragged their feet getting an appraisal and have a deadline, that is, bluntly, not my problem!) Deal clients cannot wait weeks for results. They need them ASAP, and they understand that what they need is ballpark estimates and that ballpark estimates are not precise.
- Clients are fee sensitive.
With all that said, how do I provide appropriate ballpark estimates that are relatively quick and inexpensive? The answer: limited calculations, to use other appraisal societies’ and USPAP’s terminology. IBA Standards permit limited calculations, but they are called “Preliminary Opinions” and are covered by Standard 6, which tells you how to appropriately qualify your report. Be sure as well to modify your certification accordingly, particularly clauses (a), (b), (c) and (e). See IBA Standard 1.25 for a model full certification; the modifications for limited calculations / preliminary opinions are obvious.
You have discretion in what to do in limited calculations. I can’t give you detailed guidance. Some of my limited calculations in contemplation of sale are based only on the Market Approach (Direct Market Data Method) for small businesses. Others are based just on the Income Approach (single- or multi-period models).
I NEVER submit preliminary opinions for tax, litigation, or compliance matters. Those engagements require full appraisals, full fees, and sufficient time to do the right work correctly. Not only do I want to protect my reputation, but I really don’t want to risk having my head chopped off!