In developing an appraisal of an interest in a business enterprise or intangible asset, an appraiser must:

(a)

be aware of, understand, and correctly employ those recognized approaches, methods and procedures that are necessary to produce a credible appraisal;

Comment: Changes and developments in the economy and in investment theory have a substantial impact on the business and intangible asset appraisal profession. Important changes in the financial arena, securities regulation, financial reporting requirements, and law may result in corresponding changes in appraisal theory and practice.

(b)

not commit a substantial error of omission or commission that significantly affects an appraisal; and

Comment: An appraiser must use sufficient care to avoid errors that would significantly affect his or her opinions and conclusions.  Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of the assignment results.

(c)

not render appraisal services in a careless or negligent manner, such as by making a series of errors that, although individually might not significantly affect the results of an appraisal, in the aggregate affect the credibility of those results.

Comment: Perfection is impossible to attain, and competence does not require perfection. However, an appraiser must not render appraisal services in a careless or negligent manner. This Standards Rule requires an appraiser to use due diligence and due care.

(a)

identify the client and other intended users; 89

(b)

identify the intended use of the appraiser’s opinions and conclusions; 90

Comment: An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.

(c)

identify the standard (type) and definition of value and the premise of value;

(d)

identify the effective date of the appraisal;

(e)

identify the characteristics of the subject property that are relevant to the standard (type) and definition of value and intended use of the appraisal, including:

(i)

the subject business enterprise or intangible asset, if applicable;

(ii)

the interest in the business enterprise, equity, asset, or liability to be valued;

Comment:  The interest to be valued may represent all ownership rights or a subset of those rights, such as a specific right to use the asset

(iii)

all buy-sell and option agreements, investment letter stock restrictions, restrictive corporate charter or partnership agreement clauses, and similar features or factors that may have an influence on value;

(iv)

the extent to which the interest contains elements of ownership control; and

Comment:  The elements of control in a given situation may be affected by law, distribution of ownership interests, contractual relationships, and many other factors

(v)

the extent to which the interest is marketable and/or liquid;

Comment on (i)-(v):  An appraiser must identify the attributes of the interest being appraised, including the rights and benefits of ownership.

The information used by an appraiser to identify the property characteristics must be from sources the appraiser reasonably believes are reliable.

(f)

identify any extraordinary assumptions necessary in the assignment;

Comment: An extraordinary assumption may be used in an assignment only if:

• it is required to properly develop credible opinions and conclusions;

• the appraiser has a reasonable basis for the extraordinary assumption;

• use of the extraordinary assumption results in a credible analysis; and

• the appraiser complies with the disclosure requirements set forth in USPAP for extraordinary assumptions.

(g)

identify any hypothetical conditions necessary in the assignment; and

Comment: A hypothetical condition may be used in an assignment only if:

• use of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison;

• use of the hypothetical condition results in a credible analysis; and

• the appraiser complies with the disclosure requirements set forth in USPAP for hypothetical conditions.

(h)

determine the scope of work necessary to produce credible assignment results in accordance with the SCOPE OF WORK RULE.  91

In developing an appraisal of an interest in a business enterprise or intangible asset, an appraiser must collect and analyze all information necessary for credible assignment results.  

(a)

An appraiser must develop value opinion(s) and conclusion(s) by use of one or more approaches that are necessary for credible assignment results.

(b)

An appraiser must, when necessary for credible assignment results, analyze the effect on value, if any, of:

(i)

the nature and history of the business enterprise or intangible asset;

(ii)

financial and economic conditions affecting the business enterprise or intangible asset, its industry, and the general economy;

(iii)

past results, current operations, and future prospects of the business enterprise;

(iv)

past sales of capital stock or other ownership interests in the business enterprise or intangible asset being appraised;

(v)

sales of capital stock or other ownership interests in similar business enterprises;

(vi)

prices, terms, and conditions affecting past sales of similar ownership interests in the asset being appraised or a similar asset; and

(vii)

economic benefit of tangible and intangible assets.

Comment on (i)-(vii): This Standards Rule directs the appraiser to study the prospective and retrospective aspects of the business enterprise and to study it in terms of the economic and industry environment within which it operates.

(c)

An appraiser must, when necessary for credible assignment results, analyze the effect on value, if any, of buy-sell and option agreements, investment letter stock restrictions, restrictive corporate charter or partnership agreement clauses, and similar features or factors that may influence value.

(d)

An appraiser must, when necessary for credible assignment results, analyze the effect on value, if any, of the extent to which the interest appraised contains elements of ownership control and is marketable and/or liquid.

Comment: An appraiser must analyze factors such as holding period, interim benefits, and the difficulty and cost of marketing the subject interest.

Equity interests in a business enterprise are not necessarily worth the pro rata share of the business enterprise interest value as a whole. Also, the value of the business enterprise is not necessarily a direct mathematical extension of the value of the fractional interests.  The degree of control, marketability and/or liquidity or lack thereof depends on a broad variety of facts and circumstances that must be analyzed when applicable.

(a)

reconcile the quality and quantity of data available and analyzed within the approaches, methods, and procedures used; and

(b)

reconcile the applicability or relevance of the approaches, methods and procedures used to arrive at the value conclusion(s).

Comment: The value conclusion is the result of the appraiser’s judgment and not necessarily the result of a mathematical process.

89.

See Statement on Appraisal Standards No. 9, Identification of Intended Use and Intended Users.

90.

See Statement on Appraisal Standards No. 9, Identification of Intended Use and Intended Users.

91.

See Advisory Opinion 28, Scope of Work Decision, Performance, and Disclosure, and Advisory Opinion 29, An Acceptable Scope of Work. References to Advisory Opinions are for guidance only and do not incorporate Advisory Opinions into USPAP.