When accredited/certified appraisers value businesses, equipment, and personal property, they are taught to consider and ultimately rely on a consistent set of approaches and methodologies, regardless of the industry or type of asset being appraised. This fundamental component of professional valuation principles may be the most important topic to understand in the valuation field. Without this set of guidelines, appraisers could essentially do whatever they wanted in support of reaching their conclusions, which would lead to an unregulated industry that could not be properly governed by the organizations that oversee it.
That being said, the particular types of property being appraised, along with the markets and industries in which they operate, will dictate their own set of variables that will influence value under these fixed approaches and methodologies. Depending on the overall scope of work and available data, they may also lead the appraiser down a certain path of relying on specific approaches over others.
For example, in business valuation, the multiples and risk premiums relied upon under the market and income approaches may vary considerably depending on the specific company and industry involved.
Another example in machinery and equipment appraisal is that the available market data for new and used equipment will dictate how much weight can be placed on the cost and sales comparison approaches. The useful life and effective age of a particular asset will also affect its value.
These distinct variables will influence value within each market and industry; however, the appraiser needs to stay within the lanes of the acceptable approaches they are taught to consider and rely upon.
It’s perfectly acceptable to exclude certain approaches if the data isn’t there to support them or the situation doesn’t call for it. For example, the income approach is rarely used when appraising machinery and equipment, however, it is one of the more common methods when valuing businesses as a whole. This is due in part to the difficulty of tying revenue and expenses directly to the underlying tangible assets of a business.
The premise of value being considered will also factor into the equation. If a company and its underlying assets are being liquidated and are no longer a going concern, then the approaches and methodologies relied upon will be different.
In summary, every valuation project will have its own distinct components within it, however, the appraiser must consider the same set of accepted approaches regardless of the situation.