By Jeffrey D. Jones, ASA, CBA, CBI
Developing a business appraisal is a complex process requiring the services of a professional business appraiser. Thus, your best source for determining current market value is to employ the services of a knowledgeable, experienced professional business appraiser who is designated by one or more of the major appraisal organizations.
An appraisal is an estimate or opinion of value using asset-based market and/or income approaches in conjunction with various valuation methods as of a specified date. Rules of thumb can be very misleading and reliance on business advisors who lack appraisal skills can result in inaccurate values. A “guess” may not be sufficient for your needs. Public sources may quote average prices for public companies but most small and midsize businesses are not comparable to publicly held firms due to differences in liquidity, management structure, and depth of services. When you need to know the market value of your business, the following circumstances call for a fully supported written appraisal report:
- Selling your business — When it is time to retire or move on to other investments, knowing the current market value can help you sell your business at the market value and negotiate a sale more quickly.
- Buying a new business — Whether buying your first business or growing by way of acquisition, knowing the current market value will provide you with the information necessary to negotiate a reasonable transaction and avoid offerings that are overpriced.
- Buying insurance for buy-sell agreements or key man protection — Establishing current market value will ensure that you have the facts to purchase sufficient coverage.
- Litigation issues — Determining economic damages and bankruptcy issues, resolving shareholder/partner valuation disputes and material dissolutions all call for a fully documented appraisal report specifying a value that will hold up in court and meet state and federal guidelines for valuation issues.
- Estate planning for gifts or inheritance — When tax planning for your personal estate or business interests, an appraisal can provide the needed support for a reasonable valuation that meets the guidelines of the IRS and other governmental agencies.
- Allocation of purchase price among tangible and intangible assets — Proper allocation of the purchase price among the various assets will provide the basis for value in establishing depreciation and amortization expenses for tax purposes.
- Buying, selling, and owning a business represents a major financial investment–
Financial decisions concerning your business will be some of the most critical decisions you will ever make. Having a qualified professional help conduct an appraisal and prepare a written report will ensure that you have the most complete decision making information available.
How do you find the best appraiser for your business?
- Look for an Accredited Senior Appraiser who belongs to one or more of the professional business valuation appraisal societies such as the American Society of Appraisers (www.appraisers.org), the Institute of Business Appraisers (www.go-iba.org), or the National Association of Certified Valuators and Analysts (www.nacva.org). Their members met strict education and experience requirements and successfully completed several written examinations to prove their appraisal knowledge.
- Never choose an appraiser who works for a fixed percentage of the amount of value or of the estimated cost that is being determined. An ethical and objective appraiser will charge a flat fee or an hourly fee for the work.
- The appraiser should adhere to the Uniform Standards of Professional Appraisal Practice (USPAP).
- Review the appraiser’s qualifications statement or résumé for their documented accomplishments.
- Check the appraiser’s references including recommendations by insurance companies, banks, and financial institutions.
- Conduct a personal interview to determine how the appraiser’s experience and knowledge relates to your particular assignment.
What should be in the appraisal report?
- The report should clearly state the kind of value being determined. The report should also describe the business being valued and the procedures used to estimate the value such as the analysis of comparable sales, the cost of reproduction, the relation of the appraised value to a specific point in time, or estimation and analysis of income from the property.
- The appraisal report should also stipulate that the appraiser has no interest in the business being appraised or, if the appraiser does have such an interest, that the appraiser disclosed this interest to the prospective client prior to beginning work. The report should be signed by the individual who is responsible for its validity and objectivity who made the appraisal. It must also contain that person’s qualifications data.
Jeff Jones is the President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. located at 10500 Northwest Freeway, Suite 200, Houston, TX 77092. He can be contacted by phone at 713-680-3290 or by email at email@example.com.