No one likes to focus on mistakes in business appraisals—unless it’s a Tax Court judge. Then appraisers and attorneys will want to pay attention. In their current book, A Reviewer's Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal (Wiley, 2011), authors L. Paul Hood Jr. and Timothy Lee (Mercer Capital) devote two chapters to a comprehensive review of the most common errors and omissions in tax court appraisals. The top 12:

1. Failure to comply with applicable professional standards;
2. Overstatement of valuation credentials (or inadequate listing of credentials);
3. Too much involvement by the attorney;
4. Misapplication of the standard of value;
5. Misapplication of the valuation date (most commonly, the inclusion of hindsight);
6. Failure to identify the correct business interest to value;
7. Bias and/or lack of independence;
8. Incomplete or incorrect sources of data;
9. Pure reliance on case law;
10. Failure to make a site visit or inspection, or conduct management interviews;
11. Failure to create a replicable analysis; and
12. Inadequate explanation or support for the valuation analysis and conclusions

Ironically, business appraisals can also suffer from too much information and analysis, say Hood and Lee. “The court’s first objection to appraisals is an overarching concern that there are diminishing returns in extensive numerical analyses in the appraisal process and that, no matter how the appraisal is fashioned, it has many areas for subjective determination along the way, which culminates in a subjective opinion.”

Join the authors for the most current overview. On August 9, Hood and Lee will present Omissions & Commissions: Errors, Challenges & Solutions in Business Appraisal Forensic & Valuation Services Conference Reports, a webinar that examines how business appraisers and valuation experts can best prepare themselves, their reports—and their reputations—for the high standard of legal review.