If you’re a business owner, at some point in your career you’ll almost certainly find yourself in search of someone to provide you with an appraisal (valuation) of your company. The purpose for the appraisal will likely fall within one of four categories: tax, litigation, transaction and financial.
Purpose Often Determines Best Appraisal Option
In your search, you’ll find countless professional service providers eager to propose business appraisal services. Some of these individuals may be perfectly capable of providing a reliable estimate of value depending on the purpose for which it’s needed and the size and complexity of the business. Experienced business brokers, for example, can be quite adept at developing value estimates for asking and offer prices for small “Main Street” clients, especially those brokers specializing in a specific industry.
But on whom should you rely to provide an appraisal for estate tax planning? For divorce and commercial litigation? For buy/sell agreements or shareholder disputes? And what about appraisals of larger companies, regardless of the purpose? In recent years, the recipients of business appraisal work product raised the competency bar. The IRS, for example, expects any appraisal submitted to be developed in accordance with the Uniform Standards of Professional Appraisal Practice and IRS Revenue Ruling 59-60.
Numerous other rulings and regulations might also apply, and in certain cases, the IRS requires that valuations be performed by a Qualified Appraiser as defined in the Pension Protection Act of 2006. Although no guarantees exist that the IRS will not challenge a value conclusion, you run a higher risk of finding yourself in tax court if your appraiser isn’t well-versed in these standards and guidelines.
The Small Business Administration (SBA) also specifies that, in certain circumstances, appraisals performed for the purpose of SBA financing must be provided by a Qualified Source as defined in SBA SOP 50 10(5). Being assured of your appraiser’s proficiency remains paramount if the purpose of your valuation involves a third party, such as a minority interest holder or business partner, in which case an independent appraisal performed by a qualified practitioner may enable the parties to avoid costly litigation. If legal action is likely or imminent, you’ll want to engage the services of a valuation professional with experience in providing litigation support and expert witness testimony in addition to performing the initial valuation. Remember, opposing counsel will likely have engaged an appraiser as well.
If your business’s annual gross revenues exceed $750,000, its growth trends, operations and capital structure probably preclude it from being valued reliably with the basic methodologies typically used for small, “Main Street” businesses. In fact, value estimates for a business of this size and complexity derived solely from typical broker methods or thumb rules can easily be hundreds of thousands, or even millions of dollars in error.
In short, a business owner must carefully consider the tradeoffs between cost, reliability of results, and the independence of the appraiser when selecting a professional to estimate the value of his or her business.
Seek Designated Professionals
Individuals who are qualified to perform business appraisals usually possess at least one of five professional designations highly regarded in the business valuation profession. Designees may be found through the websites of the conferring organizations. They include the CBA (Certified Business Appraiser, from the Institute of Business Appraisers), the ASA (Accredited Senior Appraiser for business valuation, from the American Society of Appraisers), the CPA/ABV (Certified Public Accountant/Accredited in Business Valuation, from the American Institute of Certified Public Accountants), the CPA/CVA (Certified Public Accountant/Certified Valuation Analyst, from the National Association of Certified Valuators and Analysts), and the AVA (Accredited Valuation Analyst, also from the National Association of Certified Valuators and Analysts).
Although experience levels will vary, a professional holding any one of these designations possesses formal training and demonstrated expertise in the field of business appraisal. If you’re in need of a valuation by an independent, qualified appraiser, seek an individual with one of these designations.
Roger Birong is a Certified Business Appraiser, Certified Management Consultant and President of Birong Associates, LLC in Jacksonville. He can be reached at (904) 641-3373 or through the firm’s website at www.birongassociates.com.