With the arrival of a new year, some dealers are considering the sale of their dealership businesses. An important first step in valuing the business or other property is procurement of the appraisal. The dealer should insist on a properly documented engagement letter or professional services contract from the appraiser. An important aspect of this instrument is to document the terms, including without limitation, the purpose, scope, cost, and other material aspects of the appraisal to be provided. There are a few common considerations to take into account in framing the appraisal engagement.
First, the identity of the client for whom the appraisal is being prepared should be spelled out. In the appraisal engagement, the client may be the business owner. In some instances, the client may also include the owner’s attorney. Also, sometimes, reliance on the appraisal may be given to a third party. The appraiser’s engagement should be clear about who the actual client is. The engagement should also address who may rely on the appraisal. For example, an appraisal of the value of a business as of a date certain for estate planning purposes does not necessarily mean the appraisal can be relied upon for other purposes. Accordingly, the appraisal engagement should identify the parties to the engagement, who the client is, and who may rely upon the appraiser’s valuation.
Another important aspect of the engagement is to define the purpose of the appraisal – why is it being performed? An appraisal done for a particular purpose, for example, may set forth a value that is different from an appraisal of the same property performed for another purpose. Equally important to defining the appraisal’s purpose is defining the scope of work the appraiser will perform. For example, is the scope that of a comprehensive valuation or an approximate estimate of value or an analysis of the business? Is the appraisal to be performed for purposes of litigation, sale, estate planning, or liquidation? It’s also fundamental to define precisely what is to be appraised. For example, many dealerships are family-owned, closely held corporations with a few owners. The scope of work required to complete an appraisal of ownership value for purposes of a buy-sell may be different from that required for purposes of succession planning. Whether it’s the value of the equity a dealer holds or the value of the business assets or the value of good will and intangible assets – the scope required for the appraisal may differ. The scope of work should be clear in the engagement.
Valuations are generally performed as of a date certain. The appraiser’s engagement should identify this date of valuation. Other aspects of the appraisal, such as the standard of value (e.g., fair market value, investment value, etc.) under which the appraisal is to be performed may be defined in the engagement. The same is true for the premise of value used by the appraiser (e.g., going concern, liquidation, etc.). Terms of this nature can be addressed in the engagement – they can also vary depending on the type of property being valued (e.g., real estate, equipment).
The dealer should address in the engagement the expectation of the end-product of the appraiser’s work and the due date for receipt. That is, spell out whether the appraiser is required to provide a formal report and in what form, including whether the dealer wants to see a draft and the time frame within which the dealer expects or needs all of this to be completed. The end-product for litigation purposes might also include the appraiser’s availability to appear in a legal proceeding regarding the valuation report.
Finally, the engagement should address the fees to be paid for the appraisal work to be performed, including whether they are charged hourly or based on some other calculation, payment dates, retainer, related expenses, and other payment terms. As with other professional services agreements, the appraisal engagement should also address other material terms, such as any limitations or contingencies, and other aspects of the relationship, such as confidentiality, default or termination of the relationship, and the like. Once the parties have adequately memorialized the terms of the appraiser’s engagement for the appraisal service to be performed, the parties may sign the engagement letter indicating their agreement with and acceptance of the terms.
Documenting the terms and conditions of the appraisal work to be performed is an important first step to procuring the desired appraisal that satisfies the dealership’s expectations, needs and purpose for the appraisal. Paying attention to the details of the engagement on the front end avoids wasted time, energy and resources on the back end, and helps facilitate the desired appraisal end-product.