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The Pros and Cons of Professional Business Appraisers

If you are buying or selling a business, then you will likely need an appraiser to provide you with a valuation of the business. An economic analysis of your business usually arises in the buy/sell context, but it can also arise during exit planning, such as when you are drafting a buy / sell agreement among the owners of your business, or when a business is transferred as part of an estate probate or administration, a divorce, a tax issue, or business financing transaction. As you may already know, there are some different approaches to a formal business appraisal and/or valuation. Such approaches include the asset method, the income method, and a market comparison method. The value of goodwill constitutes a significant element of a proper business appraisal for any purpose. The asset method focuses on the value of the assets of a business. The income method concentrates on the income generated by the entity. The market comparison method treats the business like a ‘product’ and determines what similar products have sold for in the past (similar to how the value of residential real estate is determined). The goodwill component is critically important, but is more difficult to ascertain because goodwill is a subjective and intangible asset. You can obviously opt to do an appraisal yourself or rely on a colleague that you believe possesses the appropriate skills and experience. However, a formal business appraisal is not something you should guess at or leave to casual, quasi-professional estimations. Additionally, if the valuation is required due to the purchase or sell of a business, then this type of informal appraisal will be meaningless because the buyer will typically not be willing to rely on the appraisal or will be inclined to perform their own appraisal. If you decide to obtain a formal appraisal, then the initial challenge will be to find the right kind of appraiser that charges a fair price for the appraisal. You should look for a business appraiser who is familiar with your industry. Do not use a real estate appraiser that you know or an equipment appraiser. For example, if intellectual property or exotic items such as jewels or art are involved, then you will need an appraiser experienced with valuing such assets in addition to valuing the business. Of course, many businesses include assets such as real estate and equipment, which complicates the valuation of the business. Ask yourself a basic question – what exactly are you wanting to appraise? Chances are, you are valuing the business PLUS the real estate and equipment, and in some cases, the real estate and/or equipment might be owned in an entity separate from the operating business. If this is the case, then you need to be clear that your valuation includes ALL of the business, not just the business operations or the real estate and equipment. Typically, business appraisers have professional designations and belong to certified professional appraisal organizations. Do the research and due diligence and find out what the initials after the name of a professional appraiser actually mean. For example, CBA means Certified Business Appraiser while CPA/ABV means Certified Public Accountant Accredited in Business Valuation. These kinds of professional appraisers are qualified and prestigious, and will give you a written report to support their valuation. While the professional designations are certainly important, especially when asking somebody to rely on the valuation, don’t forget to determine the experience level of your business appraiser and make sure that their fee is appropriate for their level of experience. Depending on your business, professional appraisers may charge anywhere from a few hundred dollars to tens of thousands of dollars, depending upon the size, type and complexity of the business. Written appraisals, of course, will cost more than oral appraisals. A written appraisal could take 20-50 hours to prepare and be 20-100 pages in length. In a mergers and acquisitions context, you probably want a written appraisal. Written appraisals by seasoned professionals also come in handy if a dispute, litigation or IRS audit arises after the closing. Discuss the costs and scope of the work in advance. Consulting experienced CPA and legal counsel before engaging a business appraiser can save you time, money and aggravation. Finally, make sure the appraiser is independent and trustworthy. First, try to use somebody that comes highly recommended from a trusted source, such as your CPA or business attorney.  Check them out – thoroughly. They are not simply a ‘hired gun’ and they are not your advocate. Remember, their appraisal should be unbiased to carry any credibility. R. D. Adair, PLLC offers experienced business counsel and can assist you with your business appraisal issues. To learn more about business appraisal issues, or how we may assist you in a related matter, contact us today to schedule a consultation.


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