How to Select a Business Appraiser

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If you’re a typical owner of a small to medium sized business, 60% or more of your net worth is tied up in your business.  When appraising the value of such a vital asset, it’s important to hire someone who is highly qualified. 

While our firm does not provide formal appraisals ourselves, we work with highly qualified, cost effective business appraisers in Hawaii and the mainland to deliver dozens of business appraisals annually to our clients.  Over the years, we have identified the critical steps in selecting the right business appraiser.

1. Clearly understand and define the objectives of the appraisal
2. Select an appraiser who:
1. Is independent
2. Has professional business appraisal designation(s) by at least one leading appraisal organization that are appropriate given the defined objectives
3. Has at least 3-10 years experience and is employed by a well established and reputable firm
4. Offers competitive prices.

Objectives
Understanding and defining the objectives of the appraisal is paramount.  Some objectives require a far more rigorous and in depth appraisal than others, and are naturally much more time consuming and expensive. 

The most common objectives of an appraisal, arranged roughly in ascending order of required rigor and depth, are:

1. Owner curiosity
2. To establish a price to take a business to market
3. To increase the probability and value of offers on a business being marketed
4. Exit, wealth or estate planning purposes
5. To obtain loans or raise equity capital for the business
6. To establish a price for the sale of stock/membership/partnership interest between shareholders/members/partners
7. Establishing value for various tax purposes, such as for a change of entity from C- to S-Corp
8. Resolving disputes, arbitration and litigation regarding shareholders disputes, divorce, business damages, taxation and death.

Appraiser Independence
To satisfy objectives (A or B) above, it is reasonable and appropriate to select any company/ individual qualified to estimate the value of your business, even if the chosen party has a vested interest in the outcome.  Almost all business brokers in Hawaii, for example, are not independent, as they can represent only the buyer or seller on any given transaction and are generally paid on commission, motivating them to prefer a higher sale price. 

But even on these rather informal objectives (A&B), the lack of independence can create a problem, especially for business brokers lacking in integrity.  A self interested broker may overestimate the value of a business as a lure for the seller to engage the broker’s services.  There are in fact more than a few business brokers, especially from the mainland, who do precisely this on a systematic basis, and invariably charge substantial upfront fees for the appraisal or preparation of marketing memoranda on the business.  Since they got paid a handsome sum up front, whether the business sells is not much of a concern.

For any of the other objective (C-H) above, it is essential that the appraiser be completely independent, with no vested interest in the appraisal outcome.  This requirement therefore precludes your business intermediary and anyone else who works for or provides services to your company, including your CPA.  We by no means are impugning the integrity of CPAs, but if you are contributing to anyone’s livelihood, that person is not independent. 

Professional Business Appraisal Designation(s)
Most professions tend to have just one, or perhaps two, industry organizations that provide training, testing and certification programs for members of the profession.  In the field of accounting, for example, The American Institute of Certified Public Accountants administers the Certified Public Accountant (CPA) designation program.  The International Business Broker’s Association administers the Certified Business Intermediary designation program. 

In the field of business appraisal, however, there are four widely recognized certifying organizations and even more designations.  The vast majority of reputable and experienced business appraisers have one (or more) of the following professional appraisal designations.

Most business appraisers will have the initials after their names indicating any earned designation(s).  Links to the web sites of the certifying organizations are provided above. 

As an added benefit, each of the certifying organizations requires its designees to subscribe to a rigorous code of ethics, which include in part a commitment to independence, the importance of which was noted above.

The lack of a designation does not, by itself, indicate incompetence. It likely means s/he is just starting in the field or is doing it on a part time basis.  But such an appraiser is in appropriate, in our opinion, for satisfying objectives other than (A&B).

Experience & Reputation
For objectives (C-H), select an appraiser with at least 3-10 year experience, which most will have accumulated while earning their designation(s).  Consider the reputation of the firm as well as the individual.  Don’t be afraid to ask for references.

Competitive Prices
The cost for a business appraisal varies considerably depending on the objectives and the size of the business.

Most business brokers (including VR) are willing to provide one Broker’s Estimate of Value without cost or obligation to satisfy objectives (A&B).  As noted in our Business Valuation section, it is not a trivial exercise and requires a fair amount of time, so we ask you to come to us for such an estimate. 

For objectives C-F, an appraisal for a “small market” business (valued under $1 million) will generally cost between $1,500 and $4,000, take 10-50 hours to produce and run 30-60 pages in length.  An appraisal for a middle market business (valued $1 – $300 million) will cost between $3,000 and $15,000, take 40-150 hours to produce and run 80-150 pages or more in length. 

To satisfy objective G, establishing value for tax purposes, and especially H, in support of arbitration or litigation, the costs are considerably higher and less predictable.  We recommended that you consult with a few certified appraisers and obtain written estimates from each before making a decision.

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