Valuation is the determination of 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”. Having the right valuation of your business can make or break a sale or other transaction. If you were asked what the value of your business 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” of a business. Appraisers can provide business valuations in the event of a sale, estate or gift-planning issues, for tax purposes, for litigation or in the event of bankruptcy or restructuring.
Assuming you decide to hire an appraiser, how do you decide who to hire? And how much should you expect to pay?
You must determine what type of valuation 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 valuation experts are accredited by a governing body and have received a professional designation. This means the appraiser has received training or has a certain level of experience in their field. This does not mean that an appraiser who is not accredited is not qualified to perform the appraisal engagement. However, it may be a factor worth including as you consider who to hire, 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 that the appraiser’s relationship with his or her client is not that of an employee or agent. A professional appraiser is retained as an “independent” expert and is to be an advocate only of his or her professional opinion of value. It is important to understand that this type of client relationship is different from that with the business owner’s attorney, accountant or business broker.
The most widely recognized accrediting organizations and the initials representing the particular credential granted to a professional who has earned that organization’s 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 the qualifications of the individual’s credentials, you may wish to understand the credentialing requirements of each organization.
Accredited Senior Appraiser (ASA). This designation is granted by the American Society of Appraisers (“ASA”). The American Society of Appraisers is a multi-disciplinary organization (including members in real estate, business valuation, fine arts, machinery and equipment and gemology), and requires passing an ethics exam and a course and examination on the Uniform Standards of Professional Appraisal Practice. www.appraisers.org
Accredited in Business Valuation (ABV). This designation is granted by the American Institute of Certified Public Accountants (“AICPA”). The AICPA is the national professional association for Certified Public Accountants in the United States. The additional designation of ABV requires that members hold a valid CPA certificate, and pass a comprehensive business valuation examination. www.aicpa.org
Certified Business Appraiser (CBA). This designation is granted by the Institute of Business Appraisers (“IBA”). The CBA designation requires members to hold a 4-year college degree or equivalent, successfully complete at least 24 hours of coursework offered by the IBA, and complete a CBA written examination. www.go-iba.com
Certified Valuation Analyst (CVA). This designation is granted by the National Association of Certified Valuation Analysts (“NACVA”). The CVA designation requires the successful completion of a Business Valuation and Certification course, written exam and (2) years experience as a CPA. www.nacva.com.
Of course, selecting a business appraiser will also involve comparative fee considerations. Most accredited appraisers’ fees probably average from $100 to $150 an hour. A written, formal appraisal report will typically cost at least $2,500 to $5,000 Performing the assignment will likely require 20–30 hours, resulting in a report totaling 15–50, or more, pages. However, depending on the purpose, scope and complexity of the assignment, the cost can easily exceed $10,000. If the purpose will 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, for a cost-effective and affordable fee. The individual chosen should be able to clearly communicate his or her appraisal results, both orally and in a written report, including the supporting approaches and methods for the final opinion. Investing money in a comprehensive, professional appraisal should result in measurable economic benefit to the client, regardless of the purpose of the appraisal, that will substantially justify the fee.[Check out these related webinars, which can be taken for Continuing Legal Education (CLE) credit, or simply for practical and entertaining education for business owners, Accredited Investors, and their legal and financial advisors: What’s it Worth? Valuing a Business for Sale and Selecting the Right Valuation Expert. This article is substantially similar to an article published on Financial Poise.]
Mr. Lotzer’s specialized expertise includes Business Valuations, Business Plans, Marketing Plans, Industry Research and Financial Modeling. He is a Certified Public Accountant (WI License No. 5757) and also holds the Accredited in Business Valuations (ABV) credential issued by the AICPA exclusively to licensed CPA’s that complete their rigorous accreditation requirements. His professional affiliations include the…
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