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Frequently Asked Questions

Every valuation assignment, like the subject businesses and business interests we are asked to value, is unique. A business appraiser’s fee is typically based on the complexities of an estimate using hourly rates, as it is with most professional services. Also, as with most other professional services, we only work on a retainer basis (usually half of our estimated fee). When the assignment elapsed time is over four weeks, we make progress billings once or twice a month to refresh our retainer. Included in the estimate are the likely resources that will be used on the assignment.

In some cases, we will quote a flat fee for a particular type of project, but this flat fee will still be a function of these same key variables.

In almost all cases, we provide a cost estimate. But, in doing so, we point out that most valuations are a bit like peeling back the layers of an onion, in that you really don’t know what’s behind the data and information you initially see until you get closer to the core. As a result, some clients feel more comfortable with a not-to-exceed estimate amount.

If the assignment can be broken down into phases, we estimate one phase at a time in succession. Alternatively, we make an estimate for the whole assignment based on what is known at the outset, and as soon as we recognize or sense that something has happened or has been disclosed/ discovered that may cause us to go beyond our initial estimate, we inform the client. At that time, we explain what we see and why it might cause us to exceed our initial estimate, and develop an adjusted not-to-exceed estimated amount based on those known conditions. We then ask the client’s permission to proceed, and we do not proceed further until the client authorizes us to proceed on that new basis.

Also, please note that the business appraisal profession’s ethical and professional standards forbid an appraiser from working on any kind of contingent fee basis due to the obvious conflict of interest that such an arrangement would create.

Most business appraisal assignments will generally require 20 to 40 hours of the expert’s time. However, the single most critical factor in determining the elapsed time of a business valuation is most often not the appraiser’s time, but the time it takes for the client (and/or the client’s accounting/financial staff or outside professionals) to completely gather and deliver the information requested by the appraiser.

Other than for matters involving the dispute resolution process, the total elapsed time varies from 25-30 days to 75 to 100+ days. Inside those extremes lies the six to eight weeks of elapsed time it takes for most assignments.

Generally, once the appraiser has received all the requested information, a reasonable expectation for delivery of the report is between 30 and 60 days.

Here are three classifications that encompass most business valuations:

Gift and estate taxes, S corporation conversions, estate planning, charitable contributions, ad valorem taxation, the granting of stock options and creation of pass-through entities.

ESOP’s, buy-sell agreements, exchange ratios, mergers, acquisitions, divestitures, roll-ups, LBOs (leveraged buyouts), IPOs (initial public offerings), debt and equity financings and solvency and fairness opinions.

Dispute (Litigation/Arbitration) Based
Divorce, condemnation, bankruptcy, shareholder actions, breach of contract and a variety of damage determinations.

The purpose and use of an appraisal plays a large part in determining the scope of the assignment, the type of appraisal to be conducted, the type of report to be completed and the methodologies to be utilized. USPAP Standards and most standards promulgated by the professional appraisal organizations require that the purpose and use of an appraisal be stated in the appraisal report.

As a result, opinions must be developed for a single, specific type of business interest or event. As the purpose is often determinant of the type/standards (in short, the professional or legal “rules” to be used for that specific event) not many “multiple purpose” needs can be ascribed to a single appraisal as at a specific day. It seldom occurs that the multiple purposes (and applicable multiple dates) for which you might want to use a single independent appraisal are similar-enough to apply to your multiple purposes.

Of course, you may be able to achieve some savings of fees, costs or time by having separate reports on the same subject prepared at virtually the same date, if each resultant report fills your separate but specific needs.

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.

Information Request
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.

Preliminary Analyses
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.

Valuation Analyses
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.

Report Writing
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.

Not all business valuations are created equal. A credible valuation requires an experienced and knowledgeable professional to give an independent, well-reasoned and well-supported opinion.

Business valuation is a complex and evolving field. It includes elements of finance, accounting, law, economics, management and other disciplines. Because business valuations usually give rise to significant financial and legal implications, a certain level of care must be exercised in choosing a qualified valuation expert. Consider the following:

You should seek a valuation expert that has a significant level of experience conducting business appraisals. Not only does experience help develop the knowledge necessary to attain technical proficiency, it also cultivates the judgment that is a critical component of a good business valuation.

The courts, Internal Revenue Service and other authorities demand an experienced, credentialed valuation advisor. Often this means seeking the expertise of a person who devotes all or substantially all of their professional efforts toward providing business valuation services.

Business Valuation Credentials
Unlike many other professions, business valuation “experts” may or may not have even a minimal level of competency. No college major exists in the discipline, nor are there any state or federal licensing requirements. However, several organizations offer professional certifications for business valuation advisors. These include:

American Society of Appraisers: The ASA’s premier business valuation designation is Accredited Senior Appraiser (ASA). Earning the ASA designation requires meeting certain educational requirements, passage of an exam and the equivalent of five years of full-time business valuation experience. Like the CBA, it also requires the applicant to submit their work product to a group of leading practitioners who put it through an exacting peer review.

American Institute of Certified Public Accountants: The AICPA grants the Accredited in Business Valuation (ABV) designation only to CPAs who have passed an exam and demonstrated experience in the field (defined as involvement in six business valuation engagements or 150 hours that demonstrate substantial experience and competence).

Institute of Business Appraisers: The IBA’s principal accreditation is the Certified Business Appraiser (CBA) designation. To attain this credential, applicants must meet certain educational requirements and pass an exam. Additionally, applicants must demonstrate 1,000 hours of business valuation experience or 90 hours of advanced course work. Most importantly, applicants must undergo a demanding peer review process, where a committee of leading valuation practitioners evaluates the applicant’s competence through a review of two “demonstration reports.”

National Association of Certified Valuation Analysts: NACVA offers the Certified Valuation Analyst (CVA) credential, which requires a CPA license, attendance at an optional five-day training course, and passage of an exam and case study.

If you need a business valuation, ask verify the expert’s professional designations, and remember that the degree of difficulty involved in attaining these credentials varies.

Other things to consider:
  • Membership in one or more professional societies dedicated to business valuation indicates a commitment to the field.
  • Continuing education not only provides training on developing trends and issues, but it promotes interaction with leading professionals and shows a dedication to professional improvement.
  • Adherence to a set of professional standards and/or code of ethics is a minimum requirement for a credible valuation.