How do you know if your business appraiser did a good job? How do you know if the conclusion is close to reality? After all, you're not an appraiser. I can't guarantee your appraiser did a good job, but perhaps I can give you some tools to evaluate the appraiser's work.

If at all possible, particularly if you are paying for the appraisal, you should ask for a draft copy of the report before it is issued in final form. Review the draft carefully, looking for the answers to the questions below and considering how well the appraiser addresses the following issues:

Getting started

• Did the appraiser correctly identify the purpose of the valuation?
• Did the appraiser correctly identify the ownership interest being valued?
• Did the appraiser correctly identify the structure of the business enterprise?
• Did the appraiser correctly state and provide adequate detail regarding the rights associated with the ownership interest being valued?
• Is the standard of value stated and clearly defined?
• Does the standard of value used match the purpose of the appraisal?
• If a certain standard of value is required by the appraisal, does the standard of value match that requirement?
• Do you understand the standard of value that is being used and the implications that standard has on the assumptions the appraiser uses?
• Is the premise of value stated and clearly defined?
• Does the premise of value used match the purpose of the appraisal?
• Do you understand the premise of value that is being used and the implications that premise has on the assumptions the appraiser uses?
• Did the appraiser use the correct valuation date?
• Did the appraiser err by considering or relying on information that was not known until after the valuation date?

Appraisal Considerations

• How in depth was the appraiser in documenting the nature and history of the company?
• Is it clear that the appraiser understands the company and its history?
• Is it clear that the appraiser understands what key factors drive the business model and its profitability?
• Is it clear that the appraiser understands the company's key risk factors?
• Has the appraiser considered the economic outlook as of the valuation date?
• Has the appraiser related the economic outlook as of the valuation date back to the company and considered the economic impacts most likely to affect the company and its business model?
• Has the appraiser considered the state of the company's industry as of the valuation date?
• Has the appraiser related the state of the industry as of the valuation date back to the company and considered the industry impacts most likely to affect the company and its business model?
• Has the appraiser adequately considered competition, including market share, closest competitors, the sustainability of the products or services in the face of competition, etc.?
• Does the appraiser adequately understand the company's capital structure?
• Does the appraiser adequately understand how the company's capital structure, both debt and equity, may change in the future?
• Has the appraiser prepared an analysis that compares the company's financial structure to that of its industry peers?
• Has the appraiser performed a sufficient analysis of the company's income statement to understand how the company makes money?
• Does the appraiser understand how the company's business model may change in the future?
• Has the appraiser prepared an analysis that compares company's earnings model to that of its industry peers?
• Has the appraiser performed sufficiently thorough analysis of the income statement to understand what items go into the underlying expense items on the income statement?
• Has the appraiser performed an analysis of the timing and amounts of distributions the company has historically made?
• Has the appraiser performed sufficient analysis to know what portion of earnings are going to be required to be reinvested in the company in the future, whether in the form of working capital or fixed assets?
• Is goodwill an issue in the appraisal, and, if so, has the appraiser adequately analyzed goodwill?
• Does the appraisal require the appraiser to separate personal goodwill from enterprise goodwill? If so, has the appraiser appropriately done this type of analysis?
• Has the appraiser considered whether any transactions have occurred in the past in company stock?
• If such transactions exist, has the appraiser adequately analyzed such transactions in order to determine whether those transactions are relevant in determining value?

Approaches to Determining Value

• Has the appraiser considered all three approaches to determining value, including, an income approach, a market approach and an asset approach?
• If the appraiser has excluded a specific approach does she have adequate reasons for doing so?

Income Approach

• What type of income approach did the appraiser use, if any?
• Does the income approach used match expectations? i.e., if dramatic changes are expected in the future, has the appraiser used a discounted cash flow model?
• Does the projection make sense?
• Is it reasonable to assume that the company could achieve the financial results the appraiser is projecting?
• Do you understand all the assumptions that went into the projection?
• Do the assumptions presented comport with your plans as to how the company will operate in the coming months or years?
• Does the appraiser clearly show how the discount rate was calculated?
• Does the appraiser clearly state what portion of the discount rate is for company specific risk?
• Does the appraiser clearly state her reasons for applying the company specific risk premium she uses, and are her stated reasons valid?

Market Approach

• What type of market approach did the appraiser use, if any?
• What process did the appraiser go through to try and identify comparable companies?
• How detailed was the appraiser's analysis in determining whether the comparable companies were actually comparable?
• Are there flaws in the appraiser's analysis regarding the companies she deemed were comparable?
• Do you agree that the appraiser correctly identified companies that were comparable?
• Do you know of any comparable companies that the appraiser has failed to identify?

Asset Approach

• What type of asset approach did the appraiser use, if any?
• When marking assets and/or liabilities to fair market value, what analysis did the appraiser perform when making such adjustments?
• Did the appraiser have adequate support for the adjustments to the assets and liabilities she made?
• Did the appraiser adequately consider any contingent assets or liabilities?
• Did the appraiser consider any costs necessary to liquidate assets?

Premiums and Discounts

• Does the standard of value necessitate an evaluation of premiums or discounts?
• What level of value does the appraisal contemplate determining? i.e., controlling or noncontrolling?
• Do the methods used under the income approach, market approach or asset approach require the use of the discount or premium to arrive at the correct value?
• Has the appraiser made more than one adjustment that increases the value because of control, or made more than one adjustment that decreases value because of lack of control?
• Has the appraiser adequately justified his position on discounts?

Wrapping Up

• How has the appraiser reconciled different values obtained using different approaches to value?
• Does the concluded value make sense in light of the facts and circumstances?
• Would a buyer being willing to pay, and would a seller be willing to accept the concluded amount?