-by Lemuel J. Lim, LL.B.(Hons)(UK), LL.M. (UK), LL.M Tax (US)
Should you hire an appraiser to value the small business you are buying or selling? This article answers that question and explains what to keep in mind. It is part two in a series on what you need to know when valuing a small business.
I. Should I Learn Valuation Methods if I’m Hiring an Appraiser?
You should understand the “technical” valuation methods regardless of whether you hire an appraiser. An appraiser can give guidance and provide a number, but you should exercise your own judgment, particularly if you are a buyer spending enough to make you nervous.
II. Whether to Hire an Appraiser
It is definitely advisable to hire a qualified appraiser if the business operations generate gross revenues above $100,000 a year or where a party thinks they would be overwhelmed during negotiations on finding an agreed price. It is also advisable to hire a qualified appraiser where:
- the business is focused on technology;
- the business has high expenditures in research
and development;
- the business has a lot of intellectual property (such
as trademarks and patents); or
- where the business is based on a unique product or service offering.
III. How Much Do Appraisals Cost?
A competent “preliminary appraisal” may cost around $3,000 to $10,000. A preliminary appraisal is a less comprehensive form of analysis and is suitable for situations where a ball-park estimate of the business is needed as a starting point for negotiations. Preliminary appraisals are also suitable for situations where a party needs some assistance to understand what the value-drivers of the business are. For sellers of smaller businesses, this might seem like too much money, but it can definitely be worthwhile. If the valuations for the business are off, this could potentially cause the seller to lose out on a higher price, or the buyer to overpay.
A competent “comprehensive appraisal” may cost anywhere from $7,000 to $50,000 plus (depending on the size and complexity of the business). For smaller to medium sized businesses, this kind of appraisal is usually not necessary but there are situations where obtaining a comprehensive appraisal may be the more appropriate course of action. We list a few examples:
- Where the business has shareholders who are sophisticated
investors such as venture capitalists, experienced angel investors, or hedge
funds.
- Where the business has sophisticated creditors
who have locked the business under a loan agreement granting them the power to
demand this kind of appraisal.
- Where there are problematic minority
shareholders whom the business or majority shareholder anticipate may take
potential legal action.
- Where there is a forced-buyout of a business.
- Where there is a sale as a result of a dispute
between co-owners of a business.
- Where there is a sale as a result of a family
law issue, e.g. divorce.
The above fee estimates are just approximations to give you a flavor of what to expect.
IV. Getting a Quote from an Appraiser
Sometimes, when a party approaches an appraiser for a quote, they may receive the response: “it depends.” Don’t be put off.
There are things you can do to help the appraiser estimate a more precise fee. For example, try to clearly communicate what the purpose of the valuation is, especially if the purpose for obtaining a valuation is driven by any of the example scenarios listed above. Communicating who the users of the report will be is also helpful, as is explaining the nature of your business.
You should also consider sharing with the appraiser at what point in the negotiation process the valuation will be used. For example, is the appraiser’s report to be used as a starting point for negotiations? Or is the report required because there is a deadlock in later negotiations? Some appraisers are willing to quote a flat fee for a particular type of project in order to give their client some cost certainty, while some valuation experts will insist their charges must be on an hourly rate basis.
All the above pricing guidelines for appraisers are based on the assumption that the business in question has good bookkeeping and accounting records. Generally, the appraiser cannot commence the engagement until there are good financial statements (income statements and balance sheets) available. If a business’s bookkeeping and accounting records are shoddy, this may cause complications and increase the cost of the appraisal.
When hiring a professional valuation agent, look for a CPA (Certified Public Accountant). More importantly, look for a CPA with a reputable business valuation certification, such as an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), and especially ASA (Accredited Senior Appraiser). Any one of these three credentials is sufficient – the appraiser doesn’t need them all.
We hope you found this article helpful. Our firm believes in making quality information available online free of charge; and, in that vein, we’ve written on numerous related topics. We encourage you to visit our firm’s business resource page.