Choosing A Business Appraiser
To appraise a business, you need a business appraiser. People get business appraisers confused with real estate appraisers and equipment appraisers. They are not the same.
Each of these major categories of appraisers (business, real estate and equipment) has its own separate discipline. There are even sub-disciplines and specialists within these three categories. Sometimes, an individual appraiser will wear more than one hat, especially in rural areas.
To determine the type of appraiser you need, start by asking yourself, “Just what it is that I need to have appraised?” Is it mostly equipment, mostly real estate, or are you in need of determining your business value above and beyond these more tangible assets?
Look for a ‘Professional Designation’
You will want to hire the best business appraiser you can afford. There is, however, confusion in the marketplace about what credentials a business appraiser ought to have. One key is to look for the appraiser’s ‘professional designation.’ The other is to get references and ask about his/her history and level of experience.
Most business appraisers will have will have initials after their names that indicate the designation(s) they have earned. The ones you are most likely to see are issued from just five recognized professional associations (see chart). A visit to their website is all you need to find out who is recognized in your area.
FOOTNOTE (*1) We have excluded the rarer, most senior fellowship designations (FIBA and FASA) of the IBA and ASA. The industry gurus have these designations, usually as high honors for a distinguished career spent in business appraisal.
Lack of a designation does not, by itself, indicate incompetence. A failure to have one of these designations, however, probably means that your would-be appraiser has either just started working in the field or is, perhaps, not active on a full-time basis.
Particularly if your business is small, an experienced business broker can help you set an asking price without the need for a business appraiser. If you need a written report or anticipate litigation, though, you definitely need a business appraiser with a professional designation, and sometimes more than one.
Understand the Costs
There are several levels of service that business appraisers offer. Business appraisal costs can range from $1,000 to $35,000 and more! An oral report for $1,000 is a bargain! A written appraisal for $35,000 is, in most cases, a rip-off! The price you will have to pay is likely to be in between somewhere.
Discuss your needs with your advisors and with the appraisers you interview. Set the minimum level of report that you need. Ask each appraiser for a cost estimate for that type of minimum effort.
Negotiate with the appraiser. Some will do hourly and/or oral work; some simply won’t. There are good reasons not to, and we respect those who won’t.
The oral appraisal is much more cost effective than the written report. You still get the appraiser’s professional conclusion without making the appraiser write the report you may not need. Some appraisers will then give you credit for the oral appraisal cost against the cost of any written report needed later.
A simple oral valuation may cost as little as $1,000. This type of appraisal is accurate enough for setting the asking price of a small business. An appraiser might also offer to sell you their time based upon an hourly consulting rate. It’s worth asking.
Most accredited business appraisers charge at least $150 per hour and will need to spend at least two to four hours doing the minimal homework required for an oral appraisal. It also takes an hour or two to explain it to the client.
A written business appraisal is going to cost between $8,000 and $10,000 in most parts of the U.S. It will typically take an appraiser from 50 to 75 hours of work to complete the appraisal. It will run anywhere from 15 to over 100 pages in length.
The cost can easily increase to well over $10,000, depending upon the circumstances. The highest fee that I know of for a straight-forward report is from a national company that charges $35,000 for a less-than-complete computerized and automated report that should be about $2,500. So, beware! Appraisal work can vary so much that you really need to get some estimates for your specific project.
In litigation, the costs can skyrocket when the interrogatories and depositions start. Appraisers usually charge a premium hourly rate for litigation preparation and testimony because the time it takes is always lengthy, unpredictable and out of their control. $175 to $250 per hour is a typical appraisal rate for such court battles. Under these circumstances, the appraisal fees can reach dizzying heights.
Keep in mind, that whenever you ask an appraiser to put an appraisal in writing or to testify on the record, you require the appraiser to enter a whole new level of preparation.
The public record in the U.S. court system is researchable and appraisers’ written opinions and testimony on the record must be precise and accurate. The smallest details have to be considered. The words have to be carefully chosen. Mistakes could prove fatal in another case many years later! This type of preparation simply takes more time and costs more money.
Insist Upon Independence
The business appraiser’s work and value opinion must be independent to maintain credibility. You need to know this, and to insist upon it, to preserve the value of the appraisal itself.
Business owners often incorrectly assume that the business appraiser they hire is, like their attorney, a ‘hired gun.’ If this were so, then the business appraiser’s opinion and report would be worthless and without credibility.
You do not want a business appraiser who compromises independence and credibility by becoming your advocate.
Every business appraiser with a professional designation subscribes to a code of ethics which requires independence. The appraiser must not become the employee, agent or advocate of the client. A professional appraiser is hired only as an independent expert and is to be an advocate only of his/her own professional opinion.
Before you actually hire a business appraiser, you will be asked to read and sign an appraisal agreement or engagement letter. This agreement will clearly describe the independent nature of the appraiser’s opinion. Any report you receive will also have this independence clearly described.
Use Common Sense
When selecting your business appraiser, use common sense. Determine what you need appraised and choose the right type of specialist. Learn about your business appraiser’s credentials. Don’t agree to any fee without checking around.
The business appraisal field is complicated. You can become distracted by the details. The process of selection, however, is as simple as taking time to interview several candidates and asking about their credentials, experience and costs.
[Author’s note: Although I am an accredited business appraiser, I no longer sell my appraisal services on a “fee” basis. So, in writing this article, I am without a conflict of interest. I serve now as a full-time business broker only, using my appraisal skills only in the service of our seller clients. When an appraisal is
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