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How to Choose a Business Appraiser

Jun 18, 2008
Like everything else in life, the answers to these two questions are more complicated than most people expect. The principles of selecting a business appraiser, however, are fairly straight forward.

Both sellers and buyers need business appraisals. There are many varied reasons for needing to know what a business is worth. They range from selling to divorce, from tax planning to partnership disputes.

Chances are that you already need a business appraisal, or you wouldn't be reading this article. And, you probably don't know where to turn. Most people -- even bankers, lawyers and accountants -- don't understand the ins and outs of choosing a business appraiser. Here are some suggestions to point you in the right direction.

Hire the Right Type of Appraiser

To appraise a business, you need a business appraiser. People get business appraisers confused with real estate appraisers and equipment appraisers. They are not the same.

Each of these major categories of appraisers (business, real estate and equipment) has its own separate discipline. There are even sub-disciplines and specialists within these three categories. Sometimes, an individual appraiser will wear more than one hat, especially in rural areas. However, when you need a business appraiser, you don't want to hire a real estate or equipment appraiser by mistake.

The problem is that almost all businesses have equipment and many also have real estate. So, it can be difficult to determine what type of appraiser is appropriate. There are even times when you need more than one type of appraiser.

To determine the type of appraiser you need, start by asking yourself just what it is that you need to have appraised. Is it mostly equipment, mostly real estate, or are you in need of determining your business value above and beyond the equipment and real estate value?

Look for a 'Professional Designation'

Let's assume that you decide you need a business appraiser. You will want to hire the best business appraiser you can afford. There is, however, confusion in the marketplace about what credentials a business appraiser ought to have. The key is to look for the appraiser's 'professional designation.'

Business appraisers appear to have widely different backgrounds. To an outsider, it's confusing. Different capabilities result from each appraiser's unique experience and specialized educational background.

Most business appraisers will have a 'professional designation.' They will have initials after their names that indicate the designation(s) they have earned. The ones you are most likely to see (*1) that require serious study and actual appraisal experience and which are issued from reputable and recognized trade associations include:

Initials Which means: Earned from:
CBA Certified Business Appraiser Institute of Business Appraisers (IBA)
ASA Accredited Senior Appraiser American Society of Appraisers (ASA)
CPA/ABV Certified Public Accountant
Accredited in Business Valuation American Institute of Certified Public Accountants (AICPA)
CVA Certified Valuation Analyst National Association of Certified Valuation Analysts (NACVA)
CBV Chartered Business Valuator Canadian Institute of Chartered Business Valuators (CICBV)

(*1) We have excluded the rarer, most senior fellowship designations (FIBA and FASA) of the IBA and ASA. The industry gurus have these designations, usually as high honors for a distinguished career spent in business appraisal. We have also omitted the advanced "Business Valuator Accredited for Litigation (BVAL)" designation being introduced by the IBA this year.

Lack of a designation does not, by itself, indicate incompetence. A failure to have one of these designations probably means that your would-be appraiser has either just started working in the field or is, perhaps, not active on a full-time basis.

Particularly if your business is small, an experienced business broker can help you set an asking price without being a business appraiser. If you need a written report or anticipate litigation, though, you definitely need a business appraiser with a professional designation.

You need to ask more questions of the business appraiser who has never earned a designation. While none of these designations is easy to earn, a full-time business appraiser of any tenure will most likely have at least one such professional designation.

Understand the Costs

There are several levels of service that business appraisers offer. Business appraisal costs can range from $295 to $35,000 and more! An oral appraisal for $295 is a bargain! A written appraisal for $35,000 is, in most cases, a - ! The price you will have to pay is likely to be in between somewhere.

Discuss your needs with your advisors and with the appraisers you interview. Set the minimum level of report that you need. Ask each appraiser for a cost estimate for that type of minimum effort.

The oral appraisal is much more cost effective than the written report. You still get the appraiser's professional conclusion without making the appraiser write the big report you may not need. Most appraisers will then give you credit for the oral appraisal cost against the cost of any written report needed later.

A simple oral appraisal can cost as little as $295. There is a business broker (with no appraisal designation) in my state doing oral appraisals for this amount. It's the lowest figure I have ever heard of from anybody. As far as I know, he is accurate enough for setting the asking price of a small business. Accredited business appraisers will also offer to sell you their time based upon a minimum amount. $500 is a more typical minimum charge for this type of service.

Most accredited business appraisers charge at least $100 per hour and will need to spend at least two to four hours doing the minimal homework required for an oral appraisal. It also takes an hour or two to explain it to the client. An oral appraisal can take as little as three, or as many as six, hours for the appraiser to complete.

A written business appraisal is going to cost between $2,500 and $5,000 in most parts of the U.S. It will typically take an appraiser from 20 to 50 hours of work to complete the appraisal. It will run anywhere from 15 to over 100 pages in length.

The cost can easily increase to well over $10,000, depending upon the circumstances. The highest fee that I know of for a straight-forward report is from a national company that charges $35,000 for the same thing that most appraisers would do for $2,500 to $5,000. So, beware! Appraisal work can vary so much that you really need to get some estimates for your specific project.

If the reason for the appraisal is litigation, the costs can skyrocket when the interrogatories and depositions start. Appraisers usually charge a premium hourly rate for litigation preparation and testimony because the time it takes is always lengthy, totally unpredictable and out of their control. $150 to $250 per hour is a typical appraisal fee for such court battles. Under these circumstances, the appraisal fees can reach dizzying heights.

Keep in mind, that whenever you ask an appraiser to put an appraisal in writing or to testify on the record, you require the appraiser to enter a whole new level of preparation.

The public record in the U.S. court system is researchable and appraisers' written opinions and testimony on the record must be precise and accurate. The smallest details have to be considered. The words have to be carefully chosen. Mistakes could prove in another case many years later! This type of preparation simply takes more time and costs the client more money.

Insist Upon Independence

The business appraiser's opinion about the value of your business must be totally independent to maintain credibility. You need to know this, and to insist upon it, to preserve the value of the appraisal itself.

Business owners often incorrectly assume that the business appraiser they hire is, like their attorney, a 'hired gun.' If this were so, then the business appraiser's opinion and report would be worthless and without credibility.

You do not want an appraiser who compromises independence and credibility by becoming your advocate. Many real estate appraisers did this in the late 1980s. They 'pumped up' the real estate projections so that the banks they worked for could make larger loans. The entire appraisal community was called to task for this practice after the real estate crash of the early 1990s. Both real estate and business appraisers are now more sensitive than ever to this issue.

Every business appraiser with a professional designation subscribes to a code of ethics which requires independence. The appraiser must not become the employee, agent or advocate of the client. A professional appraiser is hired only as an independent expert and is to be an advocate only of his/her own professional opinion.

Before you actually hire a business appraiser, you will be asked to read and sign an appraisal agreement or engagement letter. This agreement will clearly describe the independent nature of the appraiser's opinion.
Any report you receive will also have this independence clearly described.

Use Common Sense

When selecting your business appraiser, use common sense. Determine what you need appraised and choose the right type of specialist. Learn about your business appraiser's credentials. Don't agree to any fee without checking around.

The business appraisal field is complicated. You can become distracted by the details. The process of selection, however, is as simple as taking time to interview several candidates and asking about their credentials, experience and costs.

If all you are trying to book is an oral appraisal, don't expect the appraiser to meet with you personally before a commitment. You will have to make-do with a phone interview and a review of credentials and/or references the appraiser might be able to send to you. If you are choosing an appraiser for litigation, however, a free initial consultation is in order and most will accommodate an initial meeting without obligation.

You want a person who adapts to your unique situation. Their ability and willingness to listen is critical. Their ability to be timely may be important. You want the proper credentials. You want a person who can speak and write in a way you can understand.

The ideal business appraiser is a person who can deliver a reasonably accurate, understandable and clearly independent appraisal to you in a cost-effective and timely manner.
About the Author
Mark Heitner, MD, MBA, the founder of MidMEx, is a psychiatrist, author and software developer. Many patients have been owners of mid-sized companies with a business for sale. MidMEx helps sellers by creating a supportive community of verified buyers and expert business appraisers, brokers and attorneys. Many resources are available to help owners sell the business.
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