Bringing in a Pro to Value Your Business: The Questions You Must Ask
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
There are certain times in the life cycle of a business when you need more than your best guess on what your company is worth. Those reasons can vary from the practical (an owner has an opportunity to sell the business and needs to know how much to ask for) to the painful (an owner is in the middle of a divorce and needs to know how to split personal assets). In such situations, just looking at your accounts may not be enough. Rather, the best choice can be to bring in a professional to value your business.
A business appraiser or a certified valuation analyst has the education and expertise necessary to put a dollar value on a company. Finding the right match for your business does require you know a little more about the process, though.
The Right Business Appraiser
Kumi Bradshaw, the valuation director of Asgill Post, suggests that the first question a small business owner consider is why the valuation is necessary. "What is the purpose of the valuation? If it's for buying or selling a business and you are just looking for the appraiser's opinion, an estimate will suffice. There are issues that will influence the transaction value, including the buyer or seller's urgency, the availability of financing, the structure of the transaction (will or will there not be seller financing, is it paid all up front, are there other details attached to the transfer, etc.). If it's for divorce or litigation, your legal counsel may be aware of local professionals, you may be able to find them through internet searches, through the professional organizations (searching their databases), or through word of mouth (Chamber of Commerce, etc.). If it is for an ESOP (Employee Stock Ownership Program), you will want a professional with some familiarity, who can provide the service on an ongoing (probably annual) basis."
While any business appraiser can theoretically handle the valuation process for any business, there are many who specialize in specific services. If, for instance, you're putting together a stock program for your employees, as Bradshaw notes, there are appraisers who can offer you continuing help so that your employees will continue to know the value of their stock. Another consideration can be how rigorous an appraisal needs to be. Bradshaw explains that cost is directly related to how in-depth of an appraisal you need. "Litigation-related valuation typically costs quite a bit more than, for example, valuation for the purpose of pricing a business for sale. There are different levels of reports as well — letter form reports, limited reports, full reports, etc."
Finding Your Business Appraiser
A business appraiser isn't too different from the other professionals who work with your business. The initial search for an appraiser can be relatively simple. "I would start with the yellow pages, look in the Chamber of Commerce, research the databases at the different organizations (Institute of Business Appraisers / IBA, National Association of Certified Valuation Analysts / NACVA, American Society of Appraisers / ASA), or Google them (look up business valuation / business appraisal and your general location)," says Bradshaw.
Once you have a few names to consider, there are specific questions that are important to ask. Just as you wouldn't want to have a lawyer represent your business who you knew nothing about, you should have some information to make sure that a business appraiser will be able to help you. Bradshaw suggests four questions to ask a potential appraiser. First, what are their credentials? "Are they an accredited member of any professional valuation organizations?" You should also ask for references from their past clients.
It's important to ask an appraiser about his familiarity with your industry and how they can bring their knowledge to bear on your business. Lastly, ask the appraiser for an outline of his process. Bradshaw notes, "They should be able to clearly indicate to you what information they will be looking to assess."
There are a number of appropriate credentials a business appraiser might hold, depending on the type of appraisal you need. There can also be some variation if you are hiring an appraiser outside the U.S. Those credentials include Certified Valuation Analyst (CVA), Accredited Valuation Analyst (AVA), Accredited in Business Valuation (ABV), Certified Business Appraiser (CBA) and Accredited Senior Appraiser (ASA).
Making Your Decision
Bradshaw points to the importance of having an accredited and impartial business appraiser. The accreditation process guarantees a certain ethical standard that an appraiser will be held to, which can be especially important in particularly contentious situations. Unfortunately, such situations aren't out of the question, especially when personal issues are mixed with business considerations. "I strongly recommend carefully researching your appraiser for divorce or litigation matters and it may be wise to consider mutual retention (by both parties) of the appraiser."
It's also important to work with an appraiser who can make sure that you understand each step of the appraisal process. While the process is generally similar in each business valuation, being sure that you understand the final report — as well as the work that goes into it — is important. Typically, you and your business appraiser will go through a six-step process: a preliminary conversation, a proposal, an information request and assessment, a valuation calculations and report draft, a valuation review, and the delivery of the completed valuation report. A good appraiser should be able to provide you with a clear picture of what's going on at any step in the process.
Make your decision based on how well a particular business appraiser will fit with your business, his experience and education, and how comfortable you personally feel working with him.
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