Appraisal Review #2: Before the Definition

An Examination Through the Lens of Appraisal Review

In a post last week, I wrote about appraisal review, indicating that this important topic would be a new focus for  In that post, I addressed appraisal review, not as something mechanical that appraisers do, but much more broadly.  With this post, we begin to look at the standard of value of fair market value through the lens of appraisal review.

Fair market value is an important standard of value. However, most valuation texts spend very little space in discussing the topic.[1]  The discussions are typically brief and have a slant to gift and estate tax valuation.  Some authors apparently assume that all appraisers should know about fair market value.  Copies of Revenue Ruling 59-60 of the Internal Revenue Service and other rulings are often provided.

I suppose I must put myself in the category of writers who have not written a great deal about fair market value.  I wrote an article many years ago titled “Fair Market Value versus the Real World.”  A version of that article found its way into the first edition of Business Valuation: An Integrated Theory, but not the third edition.

In RR 59-60 we find a working definition of fair market value.  However, fair market value has broader applicability than the gift and estate tax arena and needs to be addressed more broadly.

In particular, a deep understanding of fair market value and the logical implications of the definitions and interpretations is important to the concept of appraisal review.  How can we review an appraisal of the fair market value of any subject interest if we lack an in-depth understanding of this, the most commonly applied standard of value?

As we begin our examination of the standard of value known as fair market value, it is appropriate to examine what is meant by three terms.  The first, of course, is the concept of standard of value.  The next concept is that of the premise of value.  The third concept is that of the levels of value.

We address the first two of these terms in this post and will examine the third in the next post.

Standard of Value

Standard of value is defined in the ASA Business Valuation Standards of the American Society of Appraisers as:

The identification of the type of value being used in a specific engagement; e.g., fair market value, fair value, investment value.[2]

The term, standard of value is not defined in the Uniform Standards of Professional Appraisal Practice (USPAP) and is mentioned only once in the 2020-2021 Edition – in Advisory Opinion 29, “An Acceptable Scope of Work.” However, USPAP does require the determination of the “standard (type) and definition of value” both in conducting and reporting business appraisals.[3]

A quick aside.  In looking up a link to USPAP, I found the following notice on The Appraisal Foundation website.

The Appraisal Standards Board voted on February 19, 2021 to extend the effective date of the current 2020-21 USPAP through December 31, 2022. 

In Standards Rule 9-2(c) of USPAP, we find the requirement:

(c) Identify the standard (type) and definition of value and the premise of value.

Standards Rule 10-2(a)(vii) then states regarding reporting for business valuation:

(vii) State the standard (type) and definition of value and the premise of value and the source of the definition;

Comment: Stating the definition of value also requires any comments needed to clearly indicate to the intended users how the definition is being applied.

USPAP requires not only that the standard (type) of value be stated, but also that appraisers should indicate to their readers how the standard of value is being applied in each appraisal.  Is the standard statement of the definition of fair market value and a recitation of the basic eight factors (you know the list – to be discussed in a later post) adequate to describe how fair market value is being applied?  I think more is required.  And if more is required in the conduct of an appraisal, more is required in the review of appraisals.

Premise of Value

USPAP refers to the standard of value as the “type” of value.  USPAP also requires that the premise of value be noted.  While the term “premise of value” is not defined in USPAP, a discussion of the concept makes its meaning clear for business appraisal in Standards Rule 9-3, Premise of Value:


In developing an appraisal of an interest in a business enterprise with the ability to cause liquidation, an appraiser must investigate the possibility that the enterprise may have a higher value by liquidation of all or part of the enterprise than by continued operation as is.  If liquidation of all or part of the enterprise is the indicated premise of value, an appraisal of any real property or personal property to be liquidated may be appropriate.

Comment: This Standards Rule requires the appraiser to recognize that continued operation of a business is not always the best premise of value because liquidation of all or part of the enterprise may result in a higher value.  However, this typically applies only when the business interest being appraised is in a position to cause liquidation.  If liquidation of all or part of the enterprise is the appropriate premise of value, the scope of work may include an appraisal of real or personal property.  If so, competency in real property appraisal (STANDARD 1) or personal property appraisal (STANDARD 7) is required.

Per USPAP, the appraiser must specify the premise of value as well as the standard of value.  Premise of value is defined in the ASA Business Valuation Standards as:

An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation; e.g., going concern, liquidation.

The discussion of premise of value in USPAP above makes it clear that appraisers should determine whether a business is worth more as a going concern than in liquidation, or whether it is worth more in liquidation than as a going concern.  In some forty years of conducting business appraisals, I have employed the liquidation premise of value in only a few instances.  I am not aware of any additional premises of value other than going concern and liquidation.

The great majority of fair market value determinations are based on the going concern premise of value.  This fact has additional implications, which we will discuss further below.

The requirements of the ASA Business Valuation Standards are like those of USPAP and mandate, in “BV-I General Requirements for Developing a Business Appraisal,” at paragraphs II.B.9, II.B.10, and II.B.11, that the definition of an appraisal assignment include:

II.B.  In developing a valuation of a business, business ownership interest, security, or intangible asset, an appraiser must identify and define, as appropriate:

9. The standard of value applicable to the valuation (e.g., fair market value, fair value, investment value, or other)

10. The premise of value (e.g., going concern, liquidation, or other)

11. The level of value (e.g., strategic control, financial control, marketable minority, or nonmarketable minority) in the context of the standard of value, the premise of value, and the relevant characteristics of the interest (emphasis added)

Both USPAP and the ASA Business Valuation Standards require the specification of both the standard of value and the premise of value for any business appraisal. We have now briefly examined the term of standard of value.

In the next post, we will discuss the conceptual “levels of value.”  The levels of value are critical to the concept of appraisal review because differences in assumptions regarding the appropriate level of value for subject interests is one of the leading causes of major differences in appraisal conclusions.

Until next time, be well!



[1] There is a lengthy discussion of fair market value in a recent book.  See Fishman, Jay E., Pratt, Shannon P., and Morrison, William J., Standards of Value: Theory and Applications Second Edition (Hoboken, NJ, John Wiley & Sons, 2013).  See Chapter 2, “Fair Market Value in Estate and Gift Tax,” pp. 35-88.

[2] ASA Business Valuation Standards published by the American Society of Appraisers, last revised November 2009.

[3] 2020-2021 Uniform Standards of Professional Appraisal Practice (USPAP), promulgated by The Appraisal Foundation.  Unless otherwise noted, all references to USPAP are to the 2020-2021 edition.

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