I just need a number for planning...

By Richard Warner, Sr. Contributing Editor

I wish I had a nickel for every time that I’ve heard that from a potential client or an advisor, who needs to know what all or part of a closely-held company is worth.  If you think about what’s being said a little bit more that statement above gets to be really interesting.  Here are a few “alternative” takes on what is really being said…

“I don’t really want to do this, but if I have to, I want to spend as little as possible on an appraisal…”  You can hear the conversation now between the attorney and the client “you’ll need to get an appraisal to figure out how much of the stock you can gift to your wife, your children, your mistress (pick one or more)”; Client replies – “how much is that gonna’ cost?”  Attorney says, “well, let me give you the names of three guys that I’ve worked with in the past and you can check them out yourself.”

What’s really going on here?  First of all, clients, attorneys, and other professionals that we deal with don’t really discriminate between an “appraisal report” and “a calculation report” and any other deliverable that we might choose to present.  I’ve written about this before, and while we as appraisers take umbrage that clients lump appraisals and calculations into the same basket, we shouldn’t be surprised.  After all, I’ve been called a lot of things, sometimes I’ve been called an “appraiser”, but I’ve never been called a “calculator”.  What’s the fix here?  My suggestion is to get all of the various appraisal standards (there’s that word again, “appraisal”) to do away with the ambiguous deliverable called a “calculation” and limit our deliverables to simply an “appraisal” or “a limited appraisal”.  I can hear the howls now.  “No way!” “We need a cost effective deliverable for our fee sensitive clients!”  Baloney.  We’re appraisers.  The people that refer work to us call us appraisers.  Clients think what they are getting is an appraisal.  Fine.  Let’s deliver an appraisal, and the only difference from one engagement to another is the “scope of work.”

I actually like this solution the more I think about it.  Think about a judge facing some sort of valuation issue.  He no longer needs to think about whether he is looking at a “calculation” or “an appraisal”.  The only qualifier that is important is “limited” and if the document is “limited” it’s an easy discussion to get to the scope of work and figure out how limited the work product actually is.

“I’m just in the planning phase right now.  The number’s not really that important.  Once I actually [sell], [gift], [get divorced] then I’ll want a real number” – This is a really interesting alternative for what the client is really saying.  If the number is not really that important, how “un-important” is the number and why as a client are you even bothering with this exercise?  Let’s think about the sale of a business for a moment.  Is it the number that’s not really important, or the eighty pages of write-up that we include as part of the report?  My guess is that the client wants us in this case to do the analysis, but the report itself is less valuable.  I have not done a lot of verbal reports, but USPAP supports oral BV reports (see standards 10-4 and 10-2(a)).  My suggestion here is to take a hard look at what we are required by standards to deliver as a “report” and then be ruthlessly efficient in terms of delivering just that.

What about in the context of a divorce?  Typically the clients are looking for a “settlement” number here.  I would almost prefer to handle these situations as a “consulting” type of engagement.  Again, do we need a big report?  In most cases the attorney is not going to forward the calculation report to opposing counsel.  Forget the paper; save a tree.  Do the analysis, document your work in the work papers and give the client only what they attach value to – in this case maybe the “number” is the result of limited analysis; fine; as long as your scope of work accurately describes the work that was done, I think you’re OK.

So how to distill all of this “wisdom” down to a few pithy points?  Well, I’ll try…

• Spend the time necessary to develop the proper scope of work for the engagement – both in terms of the analysis required and the type of reporting that supports the client’s need; spend a lot more time documenting the scope of work, either in your engagement work papers, or the written report that you produce; take the time to discuss with the client or referring attorney what type of work that you will not be doing based on an agreed to scope of work;

• If you’re one of three appraisers being recommended by the referral source don’t kid yourself that your relationship with that attorney is going to allow you to charge a premium price.  At this point you’re a commodity service provider;

• Be ruthlessly efficient in delivering only what your client places value on; is the client really willing to pay for eight pages of national macro-economic research, when you’ve been asked to value a $3 million sheet metal shop in Poughkeepsie?

• Know what market you are competing in; look, there’s nothing wrong with selling Ford Fusions (I have one, so no blowback on this…), but you shouldn’t expect to be able to sell them at Infiniti price points; in your chosen market maybe you can sell a higher volume of Fords, but you’re going to be competing differently than if you are in a market selling Infiniti’s;

• Do not compromise on your professional standards; read the standards that you are required to be in compliance with, make sure you understand what is being required, ask questions if necessary of other professionals, and then simply be in compliance; it’s not that hard;

• Finally, stop whining about price competition in your chosen market; the market is what the market is; make sure what you are delivering has value to the client and pricing will take care of itself.