There is a vote taking place across the professional associations that most people outside our industry will never hear about, and most people inside it will not think twice over. It concerns whether valuers should be mandated to comply with the International Valuation Standards, or merely encouraged to. I sit on the side that lost that argument within my own associations. I want to explain why I still think I was right, and why the outcome of that vote should matter to the accountant reviewing a business transfer, the solicitor drafting a settlement, and the business owner about to accept a number from somebody they have never met.

As I understand it, the major accounting bodies, the Institute of Public Accountants among them, recommend applying International Valuation Standards without requiring them to be more than simply guidance.

My second association, the Australian Institute of Business Brokers, recently voted to bring its own position closer to that model. I understand the reasoning. Flexibility has its appeal. A framework that can be adapted to circumstance feels more forgiving than one that cannot. But there is a difference between flexibility and permission, and I think that difference is being lost.

Here is the distinction I want to draw, and it is not a semantic one. A valuation and an assessment are not interchangeable words, however often they are used as though they were. An assessment is an opinion, offered on the basis of limited information, for limited purposes, with no particular warranty or claim to particular mastery attached to it. A valuation is something else entirely. It is a representation of competence. It says, in effect, that the person offering it possesses a set of skills, a body of experience, and a defensible methodology that puts their conclusion above the ordinary opinion of an interested party. That representation is not free. It carries weight, and the law has quietly built an entire body of principle around exactly that weight.

Consider what happens the moment somebody who is not equipped for the task offers a free valuation, as so many do, as a door opener, a marketing gesture, a way of getting a foot inside a business owner’s front room.

This is not merely careless language. Increasingly, in my view, it is calculated. To offer a free valuation while possessing neither the skill nor the intention to stand behind the figure is to wrap a cheap, all care and no responsibility attitude in the cloak of skill, experience and respectability that the word valuation is meant to signal. Dressed up that way, an offhand guess borrows credibility it has not earned. Call it what it is. This is not the protected puffery of an advertisement boasting the best steaks in town, a claim no reasonable person could ever take as fact. It is calculated to be believed, and relied upon, by a business owner who has every reason to trust the person using the word. A representation made knowing it will be relied upon, without the skill or intention to honour it, sits far closer to misrepresentation than to marketing, and in its most cynical form, edges towards the fraudulent.

Under Australian common law, the principle established in cases stretching from Hedley Byrne through to the High Court’s decision in Shaddock and Associates against Parramatta City Council is straightforward. A person who holds themselves out as possessing a special skill, and who gives advice in the course of business, takes on a duty to exercise reasonable care in giving it. It does not matter that the advice was free. It does not matter that nobody signed a contract. The moment you use the word valuation, you have made a representation that you possess the skill the word implies, and the law will hold you to it.

Then there is the statutory side of the same coin. Section 18 of the Australian Consumer Law prohibits conduct that is misleading or deceptive, or likely to be so, in trade or commerce. It is no defence to say the conduct was an honest mistake. The test is the impression created in the mind of the reader, not the intention in the mind of the person who wrote it. A figure dressed up as a valuation, when it was never more than a cursory glance at a set of financials, creates precisely that impression. Whether the recipient ever brings a claim is beside the point. The exposure and the risk existed the moment the word was uttered or carelessly printed in a web page advertisement.

I do not say any of this to frighten accountants and solicitors away from the word. I say it because I believe “valuation” deserves more respect than it currently receives, and because I think the professionals who refer their clients onward, for a genuine valuation, are protecting those clients in a way that a free estimate never will.

I return therefore to my opening logic and my first statement. A valuation is not a courtesy. It is a defensible, documented, repeatable process, built to survive scrutiny from a court, a tax office, or a sceptical business partner on the other side of the table.

An assessment built on a glance at last year’s profit and loss statement is not that, and careless and frivolous use of the word valuation should be avoided. Indeed our profession should call it out, not just for the risk it creates, but for the stability, trust and clear set of rules that apply to valuations, whether or not those rules are mandated by the profession.

So here is my honest position, having lost the vote within my own association. The International Valuation Standards have been produced due to the high demand for a common language, a common structure, its teachings and ethical guideposts.

Mandatory or not, I intend to keep using the word valuation as though it means something more than a layman’s guesstimate. Because it does. Ask yourself, next time somebody offers you a free valuation, what exactly you are being offered, and what it would actually take to defend that figure if somebody ever asked you to.

Kevin Lovewell is a Registered Business Valuer and a qualified accountant, and this article is offered as general commentary rather than legal, tax or valuation advice specific to any individual circumstance. If you require a defensible, properly documented business valuation, or wish to discuss what that process actually involves, contact Kevin directly on 1300 551 757.