What You Need to Know for Your Business Valuation

A business valuation could be for a gift of ownership to children in the family business or to determine the value of a piece of ownership upon the death of one of the shareholders. Or it could simply be that an owner is looking to sell his business in a certain number of years and wants to know what the market may provide him from a financial standpoint. Whatever the reason, an owner may be looking to have an appraisal performed on his business or his ownership interest. The next logical question is – who do they use? And how do they go about selecting that person?

Choosing a Business Appraiser

Unlike other commodity type services that professionals may provide, performing a business valuation is a mixture of both art and science. Each valuation engagement provides its own unique set of circumstances, considerations, intricacies, and potential pitfalls. And while each engagement will have a similar set of prescribed procedures or best-practices that will be performed, a “one-size fits all” approach may miss the mark on arriving at a reasonable conclusion of value.

While the cost of undertaking a business valuation should be a consideration, it should not necessarily be the determining or most important factor when choosing a business appraiser.  Given the potential amount of money being analyzed, or possibly the penalty for an inaccurate valuation if performed in a tax or other regulated setting, the cheapest alternative more than likely isn’t the best alternative.

What to Ask a Potential Business Appraiser

When choosing a business valuation expert, or any professional for that matter, you should be making inquiries regarding their experience, their training (both from an initial and ongoing standpoint), their background in valuation (and the particular industry of the subject of the engagement), the independence of the appraiser, and their reputation in the community.  Pertinent questions to make to a potential business appraiser can include such items as:

  • Do you perform appraisals on a full-time basis?  How long have you been performing valuations for?
  • How many valuations do you perform on an annual basis?  What industries do you have experience in?
  • What type of credentials do you maintain as a business appraiser?
  • How many times have your valuations been challenged, either in court, the IRS, or other regulatory agency?  If they have been challenged, were your conclusions upheld or determined as reasonable?
  • Will you provide a list of references from past engagements?

Business Appraiser should have Professional CredentialsOne of the most important areas a person should be focusing in on for a potential appraiser is their professional credentials or designations.  Under IRS guidelines, a qualified appraiser is an individual who either has earned an appraisal designation from a recognized professional appraisal organization for demonstrated competency or who has met certain minimum education requirements.

There exists a number of valuation credentials available to professionals from various recognized organizations, including but not limited to, an Accredited Senior Appraiser (ASA) offered by the American Society of Appraisers, or Accredited in Business Valuation (ABV) offered by the American Institute of Certified Public Accountants, or a Chartered Financial Analyst (CFA) offered by the Charted Financial Institute.

These and other professional credentials help demonstrate that an individual understands the critical concepts and methodologies utilized in performing valuations, are able to assimilate all relevant facts and circumstances of each unique engagement and apply their knowledge, experience and judgment in arriving at a reasonable conclusion, and are able to communicate their procedures and conclusions in a manner that can be understood by a wide range of audiences.  Additionally, most appraisal credentials require that the holder receives a minimum number of hours of continuing education related to the valuation industry so they stay up to date on any industry developments, best practices, or other relevant cases or information.

Choose an Appraiser WiselyThe choice of selecting an appraiser to perform a valuation, on what is typically a business owner’s largest asset, should not be taken lightly. Your appraiser should have credentialed from a number of organizations, many years of experience performing valuations in a wide variety of industries, and possess the financial acumen and analytical skills necessary to determine the value of a wide range of businesses or intangible assets.

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