Over the years, I have been called upon to review the work of other appraisers and damages experts. To a certain extent, the requirements for appraisal review come with the territory of being an expert witness. Appraisers for a side in litigation are often asked to review the work of the opposing expert. In the alternative, counsel may elect to retain the services of a qualified review appraiser to provide an independent review of the opposing expert’s work.
Regardless of the circumstances of retention, review appraisers have a duty to their clients and/or the courts in which they appear to conduct their reviews objectively, independently, and with integrity and credibility.
What is Business Appraisal Review?
Appraisal review is an objective exercise designed to measure appraisal work against business logic, consistency, and established business appraisal standards.
USPAP Standards Rule 3 addresses Appraisal Review which is defined as:
the act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal. The subject of the review may be all or part of an appraisal report or a review report.
That sounds simple enough, but by far the majority of appraisal “reviews” are not conducted in accordance with Standards Rule 3 of USPAP. They are rendered for other reasons noted below.
A number of years ago, I obtained the ABAR designation, or Accredited in Business Appraisal Review. At the time, it was offered by the Institute of Business Appraisers, and is now supported by the NACVA.
There is another appraiser review designation in Appraisal Review and Management. It is offered by the American Society of Appraisers and the ASA (Accredited Senior Appraiser, Appraisal Review and Management), is the designation.
When are Appraisal Reviews Performed?
I make a distinction between Appraisal Review (with a capital “R”), which are conducted in accordance with USPAP Standards Rule 3, and appraisal review (with a little “r”), which are not performed, at least in a formal sense, in accordance with this standard. In fact, most reviews of the business appraisals and damages calculations in a litigation setting are not formal reviews under USPAP Standards Rule 3.
Appraisal “r”eviews are conducted for a variety of reasons, including:
- Ongoing Litigation re Business Valuation. Often, when the value of a business is in dispute and there are two opposing experts, the work of one or both experts will be reviewed.
- Reviews for ESOP Trustees. Every Employee Stock Ownership Plan must obtain an independent appraisal at least annually. If the same appraisal firm has conducted the required annual ESOP appraisal for a number of years, the trustees of the ESOP may desire to have an independent appraiser review the work of that appraisal firm. They do so to assure the ESOP’s trustees that their appraisal firm is conducting work according to prevailing business appraisal standards and ESOP appraisal practice and that the conclusions reached are reasonable in those contexts.
- Buy-Sell Agreement Disputes. Many shareholders’ agreements or specific buy-sell agreements have provisions for multiple appraisers in the event that buy-sell provisions are triggered. I’ve written about buy-sell agreements many times and especially here. Unfortunately, differences in the interpretation (or misinterpretations) of valuation provisions sometimes create wide disparities in the conclusions of experts hired by the respective sides (i.e., company and selling shareholder). I have seen an increase in buy-sell agreements gone bad and into litigation (or pre-litigation), where one or both sides hire separate appraisers to review the reports of the initial appraisers.
- Damages Litigation. Just like with business appraisals, it can be helpful to have in independent review of a damages analysis. Every damages analysis is unique in some respects, and some are, well, quite creative, so an outside look at methodologies, assumptions, sensitivities and more is often useful. While damages analyses are not generally subject to business appraisal standards directly, the principles are important and review can facilitate understanding of a case.
Why Retain a Separate Reviewer?
You already have a well-qualified business appraisal expert who is providing an independent appraisal in your case. And there is, of course, an opposing expert whose report may reach a different conclusion. So why not have your expert review the opposing expert’s report?
That’s exactly what happens in many valuation-related litigations, particularly smaller ones. Each side’s expert spends time preparing rebuttal reports in opposition to the other side’s report. Then, each expert testifies regarding his or her report and then, each side presents rebuttal testimony to counter the opposing expert’s report.
Why would you want to do things differently? There are several good reasons why some attorneys seek the assistance of independent business appraisal review experts, including:
- Time constraints. Your side’s expert has prepared an appraisal and preparations for depositions and trial are time-consuming and difficult in order to present her testimony in prepared fashion. An outside review expert can help limit the scope of the primary expert’s testimony and help focus her preparation for deposition or trial.
- Appraisal Review Credentials and/or Experience. You may decide that retaining a review appraiser with experience and appraisal review credentials will facilitate the credibility of any presentation regarding the opposing expert’s report.
- Limit the Scope of the Primary Expert’s Testimony. When an expert testifies about his own report, and then has to testify regarding the rebuttal of an opposing expert’s report, his testimony can be wide-ranging and lengthy. Opposing counsel has two chances to cross-examine an expert, once for the initial report and again regarding any rebuttal report or testimony. Sometimes, attorneys may believe that their clients’ interests are best-served by having a second, review appraiser.
- Eliminate or Reduce Perceptions of Advocacy. Business appraisers and damages experts are supposed to be advocates only of their own independent opinions. When a primary expert reviews the work of opposing experts at trial, the process can create the perception that he or she is an advocate for her client, and not just of her independent opinions. This perception on the part of judges and juries is not a good one. It can be eliminated or reduced if an independent reviewer is retained to rebut an opposing expert’s report.
- Assist in the Preparation of the Primary Witness. Experienced review appraisers are sometimes retained as consulting experts to assist in identifying potential problems with the primary expert’s report. In such cases, the review expert will “review” the primary expert’s report and identify issues that are relatively weaker and those that are relatively stronger. Such assistance can help counsel in the preparation of the primary expert’s testimony and help in avoiding landmines and emphasizing strengths.
- Counterweight to Review Expert Retained by Other Side. Sometimes, review appraisers are retained by a side after the other side has retained one. In such cases, the review appraiser may be asked to review the reports of both sides, and may be asked to comment on the opposing reviewer’s report, as well.
I have been retained by counsel for all of the above reasons, and sometimes for multiple of the reasons. The greater the economic consequences involved in the litigation, the greater the potential for one side or both to retain services of review appraisers.
If you need the services of qualified review appraisers, feel free to give me a call or email in complete confidence. One of the highly qualified business appraisal professionals at Mercer Capital may be able to satisfy your requirements.
My two most recent books are available in an Ownership Transition Bundle. The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers and attorneys.