Would You Appraise My Business?

When asked to appraise a business, our answer would be, “It depends.”

One of the first questions to ask in response to being contacted to perform a business appraisal is to inquire about the purpose of the appraisal. There are several reasons why we would want to know the purpose of the report:

The report type depends on what audience you will be writing for.
1. Will I be writing for the business owner who already understands the operating details of the business?
2. Or will I be writing to support my concluded discounts before the IRS?
3. Or will I be writing my report and expected to defend my conclusions in front of a judge after one of my peers has had a chance to review and critique my report?

Each of those audiences will demand a different level of detail and focus from the appraisal and will directly impact the magnitude of both the fee one will charge for the work and the amount of time I will have to dedicate to the analysis.

Each business has several different correct “values” on any particular date, and I need to know which one the client needs to be described in the report.
1. Is the business being offered for sale, and the value requested is based on the value of the assets that typically transfer in a sale? Meaning, will the seller keep the cash, accounts receivable, and pay off the liabilities?
2. Or will I be appraising the value of a 50% interest in the equity of the Company for a partner buy-out, which partner owns an equal share in each dollar of cash, accounts receivable, and debt the Company owns?
3. Or will I be appraising another ownership percentage with a different level of voting rights compared to the other equity interests held by various owners?

Using any of those described scenarios to govern the valuation of a privately held business, would lead to a different conclusion of value, even if the subject business were the same for each scenario. The value of a business being sold as an assemblage of assets differs from the value of a 50% interest in the equity, which is also different from an ownership interest with varied voting right privileges.

Does the requested purpose require the appraiser to use a different standard of value?
1. Will a lender use my appraisal to determine if a requested loan-to-value ratio is appropriate (fair market value)?
2. Will the appraisal report be used by a shareholder who wishes to obtain an additional 2% interest, bringing their overall ownership to an effective controlling position (investment value)?
3. Is the report to be used in an oppressed shareholder litigation action, where discounts for lack of control and marketability may no longer apply (fair value)?

It is never a good practice to agree to appraise a business, then find out after the fact that your report is being used for a purpose different than what was intended. Please specify in your engagement agreements that your appraisal’s purpose is to be used. It may not prevent your report from being used for a non-intended purpose, but it may help provide some protection for yourself.

Are you looking to pursue a Business Certified Appraiser (BCA) credential? Visit ISBA Learning today. ISBA Learning is the home to our certifications and online courses. The Learning site also includes 100+ learning resources, including express courses, live and on-demand webinars, publications and reports, articles, templates, and worksheets!