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The USPAP provides 10 standards to meet when performing valuation or appraisal of a business. Each of these standards encompass a different type of business. Real estate valuation is covered in standards 1-6, personal property in 3, 6, 7, and 8, and businesses and intangible assets in 3, 9, and 10. This thread will be discussing standard 9, which discusses the development stages of a business appraisal. This standard is broken up into 5 rules. Rule 1 discusses how the appraiser should be knowledgeable in various methods, practices, and procedures, and to ensure he or she has not made any substantial errors. Rule 2 offers definitions to various items that the appraiser is required to identify such as different assumptions, conditions, and basic definitions of the client, product, and purpose. Rule three simply encourages the appraiser to compare the liquidation value against the going concern value, specifically to identify if the liquidation value happens to be greater than the going concern value. Rule 4 seems to add further into rule 1, encouraging the appraiser to use multiple approaches and to ensure that all variables and information is accounted for. Finally, Rule 5 requires the appraiser to be able to ethically reconcile his appraisal, by explaining the relevance and accuracy of each approach, method, procedure, and calculation.
This standard applies to businesses and intangible assets. An example in which this standard might be applicable, is to essentially all businesses. This standard requires appraisers to utilize each approach, income, market, and asset, in their final valuation. This exists to provide the most complete and accurate valuation, and compares the businesses income value to their competitors, and their assets. Being heavily invested in the stock market, this is a very valuable principle to work from. A business might be performing poorly through their income approach, however, their assets might be exponentially more valuable than the actual revenue that the business brings in. This comparison reminds me of a story told by Peter Lynch, a former fidelity mutual fund manager, in his book One Up on Wall Street. 21st Century Fox had recently purchased the Pebble Beach Golf course at fair market value. This fair market value was actually understated an incredible amount, as the assets that Pebble Beach had owned were much more valuable than the business itself. 21st Century Fox ended up selling an unused section of land on the Pebble Beach property for tens of millions of dollars (Lynch, 2000). The stock proceeded to rise exponentially, to which Peter Lynch earned an enormous gain in the stock market. This is a perfect example of ensuring the appraiser explores all sources of revenue and assets to derive an accurate appraisal as stated in Standard 10 of the USPAP.
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