If you are a business owner, at some point in your career you will almost surely find yourself in search of someone to provide you with an appraisal (valuation) of your company. The purpose for the appraisal will likely fall within one of four categories: tax, litigation, transaction and financial. And, in your search, will find countless professional service providers who are eager to propose business appraisal services to one degree or another.
Some of these individuals may be perfectly capable of providing a reliable estimate of value, depending upon the purpose for which it is needed and the size and complexity of the business. Experienced business brokers, for example, can be quite adept at developing value estimates for asking and offer prices for their small “main street” clients, especially those who specialize in a distinct industry. But upon whom should you rely to provide an appraisal for estate tax planning? For divorce and commercial litigation? For buy/sell agreements or shareholder disputes? And what about appraisals of larger companies, regardless of the purpose?
In recent years, the recipients of business appraisal work product have raised the competency bar. The IRS, for example, will expect that any appraisal submitted to them be developed in accordance with Uniform Standards of Professional Appraisal Practice and IRS Revenue Ruling 59-60. Numerous other rulings and regulations might also apply. And in certain cases the IRS requires that valuations be performed by a Qualified Appraiser as defined in the Pension Protection Act of 2006. Although there can be no guarantee that the Service will not challenge a value conclusion, you run a higher risk of finding yourself in tax court if your appraiser is not well-versed in these standards and guidelines. The SBA has also specified that, in certain circumstances, appraisals performed for the purpose of SBA financing must be provided by a Qualified Source as defined in SBA SOP 50 10(5).
Being assured of your appraiser’s proficiency is also paramount if the purpose of your valuation involves a third party, such as a minority interest holder or business partner, in which case an independent appraisal performed by a qualified practitioner may allow the parties to avoid costly litigation. And if legal action is likely or imminent, you will want to engage the services of a valuation professional who is experienced in providing litigation support and expert witness testimony in addition to performing the initial valuation. Remember: Opposing counsel will likely have engaged an appraiser as well.
Finally, if your business’s annual gross revenues exceed $750,000 or so, its growth trends, operations and capital structure probably preclude it from being valued reliably with the basic methodologies typically used for small, “main street” businesses. In fact, estimates of value of a business of this size and complexity derived solely from typical broker methods or rules of thumb can easily be hundreds of thousands, or even millions of dollars in error. In short, a business owner must carefully consider the tradeoffs between cost, reliability of results, and the independence of the appraiser when selecting a professional to estimate the value his or her business.
Individuals who are qualified to perform business appraisals will usually have attained at least one of four professional designations that are highly regarded in the business valuation profession. Designees may be found through the websites of the conferring organizations. They include the CBA (Certified Business Appraiser, from the Institute of Business Appraisers), the ASA (Accredited Senior Appraiser for business valuation, from the American Society of Appraisers), the CPA/ABV (Certified Public Accountant/Accredited in Business Valuation, from the American Institute of Certified Public Accountants), and the CVA (Certified Valuation Analyst, from the National Association of Certified Valuators and Analysts). Although experience levels will vary, a professional who holds any one of these designations has received formal training and demonstrated expertise in the field of business appraisal. Therefore, if you are in need of a valuation by an independent, qualified appraiser, your best bet will be an individual who has earned one of these designations.