Handbook of Business Valuation

By Thomas L. West; Jeffrey D. Jones | Go to book overview

CHAPTER ONE
Reasons to Value a Business
and Who Should Do It

ALLAN L. R. LANNOM

You can't appraise anything until you answer these two questions:

Value to whom?
For what purpose?

Proper terminology requires that the appraiser consider both the purpose and function of the appraisal. The purpose of the appraisal involves communicating the value premise sought. In most all situations, the word “value” will appear. The premise may be fair market value, fair value, going concern value, investment value, or a seemingly endless variety of other value types. What is of critical importance is that the appraiser precisely define the terms utilized. Clarity of purpose is crucial to a well-prepared appraisal report.

The function of the appraisal is the use to which it is put. Value conclusions may differ, sometimes dramatically, based on the function of the appraisal. A block of capital stock may have substantially differing values if its function is for sale to an ESOP, as a charitable contribution, a determination of gift tax, or a purchase by a third party. Once again, clarity with respect to the use of the appraisal not only enhances the quality of the report but allows the valuer to maintain a focus on the limitations of the assignment.

A third element that goes hand in hand with the appraisal's function and purpose is the description of the assets being appraised. It is safe to say that an inadequate or inaccurate description of the property

-3-

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