What's my business worth?

What's my business worth?

Sooner or later, most businesses owners will ask that question. It may come when they are thinking of retiring and selling or gifting all or part of their business or practice. Others will consider that question when faced with making important business decisions such as whether to expand, downsize, bring in investors or remove partners or shareholders. Some will be involved in existing or pending litigation such as divorce, partner/shareholder disputes, landlord/tenant disputes, acquisition disputes (buyer-seller-agent), bankruptcy, economic damages, insurance disputes, etc.

Of course, the obvious answer to the question is to retain a competent and qualified business appraiser. That then leads to the question: "Who is competent and qualified?" There are many appraisers who call themselves competent and qualified, but who turn out to be just the opposite? How is an owner to choose one among what may be many? There are several things for an owner to consider.

The first is whether business valuation is the full-time or part-time occupation of the appraiser. It is the difference between playing appraiser "when there is nothing better to do", and working full time as a valuation professional.

Valuations performed by persons who could have a vested interest in the results should be avoided. The agent looking for a listing or the accountant who prepared the financial reports may be qualified as appraisers, but may be biased and lack the independence required for an objective valuation.

Competency is a major factor in selecting an appraiser. Many valuation practitioners are self-appointed experts. Many have become appraisers after purchasing valuation software programs designed to create instant experts. Valuation is a discipline that requires many hours of study and many years of experience.

Merely holding membership in a valuation organization does not constitute accreditation by that organization. Relatively few of the members of the major valuation societies have met the requirements for becoming accredited or certified as valuation experts. Before retaining an appraiser business owners should interview several appraisers and not be hesitant about asking pointed questions. They should also request a copy of the appraiser's resume, also known as a curriculum vitae or CV.

The questions most commonly asked of business appraisers are:

* Have you ever appraised a business like mine?

* What's the secret formula for valuing a business?

* What methods would do you use to value my kind of business?

* How much does an appraisal cost?

* How long does it take?

* What do you need from me?

* How do I find out all of the above specifically as it applies to my business and me?

The answers are:

It is doubtful that there are any appraisers who are expert in every type of business or practice. For that reason professional appraisers are trained and educated in how to research and analyze most types of businesses.

According to the Standard Industrial Classification manual established by the federal Office of Management and Budget, all businesses and practices fall into one of the following divisions:

Agricultural, forestry, fishing

Mining

Construction

Manufacturing

Transportation

Wholesale

Retail

Finance, insurance, real estate

Services

Public administration

Non-classifiable establishments

There are probably more than 5,000 different types of businesses, professional practices and sub-categories under the SIC. For example, under SIC Code No. 5137, Wholesale Trade, Women's, Children's, and Infant's Clothing and Accessories, there are 42 sub-categories.

There is no magic formula for valuing a business or professional practice. There are many approaches and methods available to an appraiser. Some are appropriate for only valuing public companies while others are appropriate for valuing private, closely held businesses. Methods are asset-based, income-based or market-based and the professional appraiser works with all of them.

There is no specific method for appraising your business. The methods used by the appraiser are dependent on many factors, some of which are:

1. The quality of the financial reports

2. Whether the business or practice is growing or stabilized

3. The availability of economic and market data

4. Whether the business is heavy or light on tangible or intangible assets

5. How the valuation is to be used

6. The standard of value being used (fair market value, fair value, acquisition value, liquidation value, etc.)

The cost of an appraisal can vary from inexpensive to very expensive, again dependent on many factors, including:

* The quality of the financial reports (shoe box receipts, compiled statements, audited statements)

* How the appraisal is to be used. To establish a selling or offering price? As a marketing tool? For estate or gift tax purposes? In litigation such as divorce, partner/shareholder disputes, bankruptcy, economic damages, etc.

* The type of report required Letter opinion of value, short-form report, summary report or all-inclusive (full narrative)

The cost of a valuation is based on an hourly rate, or a flat fee that estimates the time required for the analysis and report. The greater the research and analysis required, and the more detailed the report, the greater the cost will be. It is always the client's decision as to the type of report required. Obviously an appraisal and report that is to be reviewed by the court or IRS will require greater detail than a valuation and report used to establish an offering price.

The time required for an appraisal can vary based on the quality of the financial reports (shoe box records, compiled statements, audited statements), the timeliness of getting the information to the appraiser, the amount and availability of economic and market data, and the appraiser's workload. The appraiser should not be retained at the last minute.

What is needed from the client to start with are good financial reports and tax returns, preferably for three to five years and prepared on an accrual basis. The professional appraiser will conduct an on-site inspection, conduct interviews with ownership and/or management, and ask a myriad of questions of the owner, management an/or the company accountant.

Jerry F. Golanty is a senior advisor with Meridian Business Advisors in Reno. He is a national governor of the Institute of Business Appraisers and Nevada's only Master Certified Business Appraiser and Business Valuator Accredited in Litigation.