Value Blog

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

A rule of thumb is defined in the International Glossary of Business Valuation Terms as “a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.”  Typically they are representative of the average price paid in an industry.  So, it would appear that using a rule of thumb would provide a good estimate of the value of a company. Should Company B still be worth twice as much as Company A?

It is the appraiser’s job to look at the facts and circumstances of a particular business operation in arriving at a value.  This includes establishing how the business compares to others within its industry.  Rules of thumb are not a recognized valuation method because often there is insufficient information available about how the multiples were developed.  Some rules of thumb are supported by market data, and others are not.

If you are interested in researching rules of thumb for a particular industry there are a number of sources:

• 2009 Business Reference Guide, published by Business Brokers Press (www.bbpinc.com)
• Handbook of Small Business Valuation Formulas and Rules of Thumb/Third Edition by Glenn Desmond, published by Valuation Press, 1994.
• How to Value over 100 Closely Held Businesses, Fourth Edition, by Stephen M. Zamucen, MBA, CPA, CVA, ABV, CFE, published by The National Alliance of Consultants, Valuers and Analysts, 2002.
• Handbook of Business Valuation, Second Edition, edited by Thomas L. West and Jeffrey D. Jones, published by John Wiley & Sons, 1999.

Additional information is sometimes available from industry trade groups.

Use caution when using rules of thumb as some of them are dated and may not reflect current industry or economic conditions.

© 2009 Florida Business Valuation Group