Valuation is the process of determining the worth of an entity or item. According to Erin Hollis, “A valuation can be as loose as a guess, to a back-of-the-envelope calculation, to a formal opinion rendered by a third-party professional business valuation expert.” Knowing the value of your business can make or break a sale or other transaction. If you were asked what business value is, would you know? How could you find out?
To find out how much a business is worth, you may need to hire a business appraiser. An appraiser is a professional who provides a disinterested, independent opinion of value for a business. Appraisers can provide business valuations in the event of a sale, estate, or gift-planning issue, for tax purposes, for litigation, or in the event of bankruptcy or restructuring.
You must determine what type of business appraisal you need and what measure of valuation you will use. There are various kinds of appraisal and valuation experts. When selling equipment, you will want to look for an equipment appraiser; when selling real estate, a real estate appraiser. But when selling your business as a going concern, you will want a business appraiser, also called a “business valuation expert,” to determine proper value.
Many business appraisers or business valuation experts are accredited by a governing body and have received a professional designation. The appraiser has received training or has a certain level of experience in their specific field. This does not mean that an unaccredited appraiser is unqualified to perform the appraisal engagement. However, it may be a factor worth considering, especially in high-stakes situations such as litigation or bankruptcy.
Business appraisers with a professional designation are required to adhere to a code of ethics that requires “independence.” This means the appraiser is not an employee or agent of their client. A professional appraiser is retained as an independent expert and is an advocate only of their own professional opinion of business value. It is important to understand that this type of client relationship is different from relationships with the business owner’s attorney, accountant, or business broker.
The most widely recognized accrediting organizations and the credentials granted with accreditation are:
|CBA||Certified Business Appraiser||Institute of Business Appraisers (IBA)|
|ASA||Accredited Senior Appraiser||American Society of Appraisers (ASA)|
|CPA/ABV||Certified Public Accountant Accredited in Business Valuation||American Institute of Certified Public Accountants (AICPA)|
|CVA||Certified Valuation Analyst||National Association of Certified Valuation Analysts (NACVA)|
To further evaluate credential qualifications, you may wish to understand the requirements of each organization.
Of course, selecting a business appraiser involves comparative fee considerations. Accredited appraisers’ fees average $250 to $350 per hour. A written, formal appraisal report costs at least $5,000 to $8,000. On average, it takes 20-30 hours to complete the work, resulting in a 15 to 50-page report. However, depending on the purpose, scope, and complexity of the assignment, the cost can exceed $10,000. If the report must support litigation, as in bankruptcy litigation, costs may be significantly higher.
Ultimately, you will want to choose a credentialed appraiser best suited to your particular circumstances at a cost-effective and affordable fee. The individual chosen should be able to clearly communicate their appraisal results verbally and in writing. The results must detail the supporting approaches and methods for the final opinion. The measurable economic benefit to the client regardless of the purpose of the appraisal should justify the cost.
[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):
This is an updated version of an article originally published on October 23, 2019. It has been updated by Courtney Smith]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Gary Lotzer joined Vantera in 2013. Mr. Lotzer has more than thirty years of diverse business experience across a broad spectrum of industries. He has served in C-level roles in lower mid-market companies located in the US, Mexico, Europe, and Asia. His specialized combination of corporate finance, marketing, and operations skills have been successfully applied…
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