When attorneys contract with appraisers to issue valuation opinions, there are 5 very important elements that the attorney must know and understand to ensure its proper and effective use. These may sound elementary, but I find that these elements are commonly misunderstood which can ultimately affect the transaction or the purpose of the appraisal.
Subject of Valuation –
The attorney, client, and appraiser need to have a clear understanding and agree on the actual subject of the appraisal.
- Are we valuing a specific service? If so, is it clearly defined, detailed and documented?
- Are we valuing a specific entity? If so, are we valuing the invested capital of a business or the net equity? Are we valuing a minority, fractional interest or one hundred percent?
- Are we valuing medical equipment? What peripherals are included? Who delivers and installs?
- Are we valuing an equipment lease rate? What is included? Do we have all the details?
Purpose of Valuation –
The attorney should inform the appraiser exactly how the appraisal report will be used. The appraisal report can be used for any of the following:
- Compliance with the Stark Law and Anti-Kickback Statue
- Compliance with the Private Inurement laws for 501(c)(3) organizations
- For federal tax compliance
- Buy/Sell agreement
- Litigation or dispute resolution
Standard of Value –
The purpose of valuation will dictate the standard of value. The attorney and appraiser should discuss the various standards of value and both agree on the proper standard to use. The commonly used standards of value include:
- Fair Market Value – Revenue Ruling 59-60
- Fair Market Value (healthcare) – Stark Law
- Investment Value
- Fair Value
Premise of Value –
This is the unique set circumstances and assumptions pertaining to the asset, transaction, or situation. The premise of value should also be discussed between the appraiser and client/attorney because this will have an impact on the appraisal value. The common premises of value include:
- Value as a going concern
- Value as an assemblage of assets
- Value as an orderly disposition
- Value as a forced liquidation
Value Date –
Finally, the valuation date needs to be clearly understood among the parties. The purpose of the appraisal will have the most bearing on this element.
If the attorney, client, and appraiser all have a clear understanding of these five elements and assumptions, then this will reduce compliance risk and ensure the appraisal is being properly used.