New AIRA Standards on Distressed Business Valuation

posted in: Valuation | 0

By Michael D. Pakter, Gould & Pakter Associates, LLC

Michael_D._PakterGiven the increasing number of professionals who are performing business valuation engagements, the Association of Insolvency & Restructuring Advisors approved Standards for Distressed Business Valuation (“AIRA Standards”), effective March 1, 2014, to improve the consistency and quality of practice among its members.

In Part 1 of a 2 part article, the author submits that the selection of applicable valuation standards is impacted by the valuation analyst’s professional certifications, his or her association memberships and credentialing, the asset, business, or interest being valued and the applicable forum. The author provides an overview of the AIRA Standards on distressed business valuations and shares views on what standards business valuation professionals should consider in a distressed business valuation engagement.

In Part 2 of the 2 part article, the author discusses some of the unique issues regarding valuations of distressed businesses relating to engagement development, procedural steps in the business valuation engagement, and generally accepted valuation approaches. The AIRA Standards note that traditional valuation methods may require significant adjustments to reflect the unique financial or operating issues associated with a firm in distress, the legal context of the valuation and the intended purpose of the valuation.

The author concludes that despite the widespread use by business valuation analysts of a specific company risk premium in a “build­up” or “capital asset pricing model” there remains limited academic research on quantification of specific company risk premiums, which generally remains in the realm of the financial analyst’s judgment.

To read the full article see Part 1 and Part 2.