RELEVANT ISSUES AND FAQ’s ABOUT BUSINESS APPRAISALS

By David V. Hanzich, CPA, MBA, ABV, CFF, CVA, CFE, CGMA

Before engaging a business appraiser, there are things your client may want to clarify. Here are some preliminary issues to discuss with your client and appraiser before defining the scope and level of service required for the business appraisal.    

How will the appraisal be used?

Appraisals are prepared for a number of purposes, to include estate and trust tax reporting, succession and exit planning, civil and family law litigation, fairness opinions, fair value assessments for financial statement purposes, ESOP appraisals, buyout provisions and others. For example, appraisals for litigation may be presented in a summary form.  The appraisal purpose should be identified before the work is started and limited to this purpose. 

Are the financial records complete and available for review?

There are a myriad of issues regarding this question.  The appraiser will adjust the balance sheet to reflect “fair market” values for fixed assets, inventory, accounts receivables, investments and other assets.  Are there any related party transactions that affect the balance sheet? Any significant intangible assets such as royalty agreements, trademarks, and patents that require separate valuations?  Does the company report on a consolidated basis?  For litigation, are financial records available from the other party?  Just a few items to ponder.

What is the standard of value?

A judge may order an appraisal, however, will not allow any discounts.  If no discounts are applied to a privately held company, is this a fair market value or fair value standard?  Is the investment or intrinsic value standard required?  What about a liquidation value?  The appraiser will need clarification regarding this issue before the analysis begins.  The standard of value will have a material impact on the overall valuation of the business.

Is there an understanding of the subject company’s fundamentals?

The appraiser should understand the complexity of the case before getting started.  Does the company have multiple lines of business or related subsidiaries? Is the company a “C” or an “S” corporation?  Are there any buy/sell agreements?  Is there a complex capital structure with different levels of ownership?  Does the company require applicable discounts for privately held companies or minority shareholders?  The corporate structure and fundamentals will affect the scope and cost of the engagement.

The business broker said the company was worth 5 times earnings.  Why can’t I use this estimate and not pay you to give me the same value?

Let’s start off with the assumption that a “rule-of-thumb” valuation technique is the most unreliable valuation method, however, it is also the most commonly used.  In certain circumstances, rule of thumb values are routinely used for small retail or service related businesses, flower shops, gas stations and others.  However, for tax and litigation matters, complex corporate structures, and certain sales transactions, there should be an adequate basis for the underlying value.  For complex matters, the burden is on you to justify your valuation claim.  If you wish to proceed without the benefit of a well-researched and documented independent and professional appraisal, the choice and risk is yours.

 
Mr. Hanzich has over 11 years of experience as a business valuator.  He has prepared hundreds of business appraisals specializing in small to mid-sized closely held companies in a wide variety of industries.  Additionally, he has testified over 50 times in civil court as a qualified expert in business appraisals.  Also, with over 20 years of experience in auditing, Mr. Hanzich has an edge over non-CPA appraisers.  If you are looking for “FMV” quality at reasonable rates, let us handle your next business appraisal. There is no engagement too small.  Call us for an estimate of cost