Failing to Yield ‘Actual Fair Valuation’

We are asked regularly to scale down our work because of the client’s price sensitivity. As appraisers credentialled by the American Society of Appraisers, we are obligated to comply with certain professional standards. First, USPAP, or Uniform Standards of Professoinal Appraisal Practice, requires appraisers to define the scope of work to be employed in the valuation assignment. Second, the ASA’s BV standards define three scopes of work and their resulant value conclusions: (1) an Appraisal, which expresses an unambiguous opinion of value; (2) a Limited Appraisal, which express an estimate of value; and (3) a Calculation, which expresses an approximate indication of value. It should be clear that there is a direct correlation between the rigor applied to the appraisal problem and the “quality” of the outcome. As an expert for your client, would you rather have us provide an unambiquous opinion of value or an approximate indication of value?

A recent New Jersey court came to the same conclusion.

The Backstory: The plaintiff founded a company providing management services to ambulatory surgical centers. He hired the defendant as the company’s president. Several oral and written agreements between the parties provided for the plaintiff’s granting the defendant 300,000 membership units in the company. This amounted to a 10% interest and was given in exchange for the company’s right to buy back the shares if it terminated the defendant for cause or he resigned from the company. At some point, the defendant sold 30,000 shares to two investors for $10 per share. He also proposed a buy-sell agreement that mentioned a $10-per-share price, but the plaintiff never accepted it or signed on to it. When the relationship between the parties broke down, the plaintiff sued to establish the fair value of the company’s stock, both to determine the value of the defendant’s interest and to exercise his right to repurchase the stock. The defendant counterclaimed to enforce his right as 10% shareholder of the company. He insisted he should receive $10 per share.

Both parties presented experts. However, the defendant’s appraiser testified that he had only been hired to prepare a “calculation of value,” not a full appraisal. The defendant had not furnished the numerous materials necessary to perform a valuation, and “more work should have been done” for a fair valuation of the company at the date of termination, he said. He added that the defendant’s proposed buy-sell agreement would be “part of the consideration” if he were to value the defendant’s shares alone but not if he were to assess the company’s worth on the termination date. The plaintiff’s expert dismissed the $10-per-share price as an “arbitrary amount” that was based on unreliable projections. He concluded that the company’s fair value was $4.2 million and the fair value of the defendant’s interest in the company was $368,700.

Falls far short: The trial court agreed with the plaintiff’s expert. It flatly rejected the buy-sell agreement as evidence of value and also dismissed the opinion of the defendant’s expert since his “calculation of value” was nothing more than an agreement between the appraiser and the client “as to the manner in which the appraiser’s work is to be done.” By the defendant expert’s own account, his calculation fell far short of the work necessary for a report that contained an “actual fair valuation of [the company].” The trial court’s ruling meant the plaintiff expert’s valuation was uncontested. The appellate court affirmed, finding the lower court provided sound reasons for excluding the defendant expert’s opinion. Since the plaintiff’s expert used the proper methodology, the trial court could rely on his valuation.

The Bottom Line: You do indeed often get what you pay for. As an expert for your client, would you rather have us provide an unambiquous opinion of value or an approximate indication of value?