Value Blog

Valuable Answers to Your Business Valuation Questions

08 Jun

What if you are on a budget?

Posted in General valuation topics on 08.06.09

There is no way to shortcut a valuation.  If you are on a budget, you can make choices that will keep your fee down.  However, if you budget it too small, you may be better off with not spending money on a low cost appraisal.

Clients decide to have appraisals done to meet a need.  Usually it is to have documentation to provide that they made a transfer at fair market value.  The appraisal could be required by the IRS or the courts depending upon the purpose.  If an appraiser knows that you will be relying on his or her opinion to provide proof, the appraisal should be done to meet that purpose in compliance with appropriate appraisal standards.

Valuations done in compliance with appraisal standards take time.  So what do you do when your budget is not large enough for an appraisal?

You may be able to reduce your fee by asking for a summary report.  Shorter reports take less time to write.  However, just because you are getting a shorter report does not mean the appraiser will do less work to reach his or her opinion.

Another option is to get a calculation of value rather than a conclusion (or opinion) of value.  The disadvantage to a calculation of value is you will not get the same level of assurance that the number is accurate.  A calculation of value is a limited scope appraisal, where the appraiser and the client agree to limit the amount of work done with the understanding that if all the work was done, the resulting value could be different.  This type of report will not necessarily satisfy the requirements of the IRS or courts, but may work for negotiations.

The bottom line is that appraisals are not inexpensive.  There are some online “valuation calculators”, but the resulting information will usually not constitute an appraisal.  If your budget is too small for an appraisal, you may want to see if you can do without one rather than spending money on something that will not satisfy your requirements.  In any case, make sure to ask questions so that you understand that the report you are getting will meet your needs.

© 2009 Florida Business Valuation Group

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11 May

Can’t the appraiser just give me a rough idea of the value?

Posted in General valuation topics on 11.05.09

I constantly get requests and questions about “informal” valuations or rough estimates of value.  In some cases, individuals are deciding whether to buy a business and they want a sanity check that they are not overpaying for the business.  In other cases, most often divorce, the parties are trying to settle a case at mediation, so they do not have the same requirements that they would to prove value if they went to trial.

Regardless of the purpose, an appraiser who follows standards of any of the generally accepted organizations will have to perform a valuation in compliance with those standards if they are determining value.  In other words, there are no shortcuts if the client wants a number from the appraiser.

The definition of a valuation is very broad.  It includes the use of valuation approaches and methodology as well as the application of the appraiser’s judgment.  The standards all indicate how the appraiser develops the value.  A number of the appraisal organizations refer to the section of the standards dealing with this as developmental standards.

So while a client looking to purchase a business may not see the “number” that he requests as being a valuation, it most likely is.

In situations of litigation, there is often confusion about the applicability of standards.  This arises because of a reporting exception in some of the standards.  The reporting exception provides that appraisers do not have to present his or her findings in compliance with the reporting standards.  The thought behind this is that in a litigation or controversy matter, the opposing party or trier of fact will adequately question the appraiser so that the relevant elements are disclosed, making the format of the report less important.

If you think about it, the reason to hire an appraiser to provide you with a value is for you to have something that you can rely upon.  If you do not need the number to rely upon, then you do not need the appraiser.  When you are relying on a value provided by an appraiser, it should be developed in accordance with applicable standards.  To perform a valuation requires a minimum amount of time, and that time translates to money.  While some situations may not seem to warrant the cost, if an independent appraisal is necessary, there is no other option.

© 2009 Florida Business Valuation Group

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24 Apr

Business Appraisals for the IRS: Qualified Appraisers

Posted in Valuation dictionary on 24.04.09

The IRS first required that taxpayers use qualified appraisers under the Pension Protection Act of 2006 in relation to claiming charitable deductions. The definition of qualified appraiser has been incorporated into penalty rules as well.

A qualified appraiser is defined as an individual who has “verifiable education and experience in valuing the relevant type of property for which the appraisal is performed”[1]. In order to have the appropriate level of education and experience for a business appraisal, an appraiser must have completed business appraisal coursework with passing grades offered by a professional organization or college AND have two or more years experience in business appraisal. The Proposed IRS Regulations clarify that an appraiser who has received a recognized appraisal designation from a professional appraisal organization is deemed to have met the education and experience requirements. (See post “How do I find an appraiser?” April 20, 2009 for a list of the appraisal organizations.)

The Proposed IRS Regulations further identify people who are NOT qualified appraisers. In particular, an appraiser whose fee is based on the value of the business is not a qualified appraiser. The donor or the donee of the property being valued cannot prepare the appraisal either. Related parties to the donor or donee also fall into this group. Any individual who has been barred from practicing before the IRS with the three years before the appraisal date is not a qualified appraiser.

This is an overview of the rules for qualified appraisers. If you are valuing a business for IRS compliance purposes, you will want to make sure that the business appraiser you select is a qualified appraiser.

© 2009 Florida Business Valuation Group


[1] Internal Revenue Ruling 2008-40

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20 Apr

How do I find an appraiser?

Posted in General valuation topics on 20.04.09

There are many people qualified to value a business.  A number of professional societies offer certifications to professionals who meet the organization’s criteria.  In selecting an appraiser, you want to understand the differences between the certifications as well as the necessary skills to value a business.

The following organizations offer valuation designations:

  • American Institute of Certified Public Accountants offers the ABV (www.aicpa.org)
  • American Society of Appraisers offers the ASA (www.appraisers.org)
  • Institute of Business Appraisers offers the CBA (www.go-iba.org)
  • National Association of Certified Valuation Analysts (NACVA) offers the CVA and the AVA (www.nacva.com)

Each of the designations demonstrates that an individual has completed certain educational requirements, experience requirement and demonstrated some level of competency through testing and/or submitting sample reports.   You can visit each organization’s website for a list of the requirements for certification.  Additionally, the different groups also have searchable directories of credentialed appraisers.

However, it is important to understand an appraiser’s actual experience, not just the letters after their name.  Some good questions to ask a prospective appraiser are:

  • How much of your practice is devoted to business valuation? While it is not necessary that a practitioner do business appraisal work full-time, it is necessary that he or she devote enough time to the work to be proficient.  Someone that does two or three valuations a year may not be the appraiser that you are looking for.
  • What type of continuing education have you completed? There are many courses and conferences available to appraisers.  You want an appraiser who regularly participates in continuing education.  An appraiser who attends different courses and conferences each year is more likely to know the current developments in the industry, compared to someone who gets all of his or her hours in once every three years by attending a single conference.
  • What type of valuations have you worked on in the past? Not all valuations are the same.  Someone who has only done appraisals for divorce litigation may not be the best fit for a client who needs an valuation for estate purposes. It is also important that you know what type of appraisal you need.
  • Will you be the one responsible for valuing my business? You want to know who will be doing the work to appraise your business.  Some firms use staff or outsource some of the work.  This is not necessarily a bad thing.  Depending upon the purpose of the report, you may want to speak to the person actually doing the work to make sure that you are comfortable with his or her credentials and experience.
  • What standards do you comply with? Each of the organizations mentioned above have appraisal standards which its members agree to comply with.  If your appraiser is a CPA, he or she may be required to comply with the AICPA business valuation standards.

These are some of the things to consider in selecting an appraiser.  If you have additional questions, please post a question.

 © 2009 Florida Business Valuation Group

 

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