One of the most common questions about business appraisal services is, “What do you do when you value a private business?” In other words, what is the process one undertakes to value a private company?
Engagement Agreement and Retainer
As with most professional services, the relationship between the client and the appraiser will typically be outlined in a written agreement. This agreement defines the scope of the valuation project, the obligations of each party, the estimated time frame, the fee and other important elements of the relationship. It is also common practice among business appraisers to require a retainer in order for them to reserve their time and evidence the client’s commitment to moving forward with the project.
The next step in the business appraisal process is information gathering. This typically comes in the form of a list of requested data and documents, such as financial statements, management bios, data on owner compensation, brief descriptions of the history of the business, its products and services, its customer base and the competitive landscape.
After obtaining all of the required documentation, the appraiser will review it, organize it and perform initial analyses to help them prepare for an interview with the owner and/or key members of management. Usually, the appraiser will also conduct some independent research of the business’ industry, economic drivers and other issues at this stage of the appraisal process. A primary goal of this step is to help the appraiser formulate relevant questions for the management interview.
Management Interviews and Site Visit
This is where the appraiser tries to get an understanding of “the story behind the numbers.” The appraiser will typically ask questions about the business itself, its industry, organizational structure, marketing activities, customers and key risk factors. A significant portion of this discussion will also involve the company’s historical financial performance and future prospects. Such an interview can be conducted face-to-face or over the telephone. Of course, the appraiser’s access to management will be subject to the client’s approval and the level of confidentiality surrounding the engagement.
A site visit of the business is usually helpful but not a requirement. The professional standards do not require a business appraiser to actually visit the business’ office, storefront or facility, and most business appraisers are simply not qualified to professionally asses the company’s real estate or equipment. Still, a site visit does allow the appraiser to make certain qualitative judgments about the business. Additionally, in a “high-scrutiny” situation such as an appraisal for a tax-related issue or litigation, the credibility that comes with a site visit cannot be ignored.
The appraiser will now synthesize the data, documentation, results of the interviews and independent research to determine how these factors impact the company. It is now that the appraiser determines the one or more appropriate valuation methodologies.
If the appraiser uses multiple valuation methodologies, each will usually yield a different indication of the value of the ownership interest. Part of the appraiser’s job is to use his/her experience and judgment to reconcile these disparate indications of value in order to arrive at a final opinion.
The appraisal process is too complex and compliance with the professional standards too difficult to allow for a verbal reporting of the appraiser’s opinion, in almost all instances (although it is permitted). As a result, the appraisal will usually be documented in a written report.
Report Issuance and Follow-up Discussions
The final stage of the engagement is for the appraiser to issue their report. Sometimes, the report comes in “draft” form, allowing the client and their professional advisors to review the facts outlined in the report. Other times, a signed, certified and bound report is issued with no draft. Typically, this step will also include a follow-up discussion with the client and their advisors to address any questions they may have about the appraisal report.