Business Appraiser Interviews
Tina: I am preparing to sell my small family business. Do I need an appraisal or is that just for big businesses?
Marcus: Performing a business valuation prior to selling your business is always recommended. Whether your company is a large private corporation or a small family business, knowing the fair market value allows you to identify what are the key value drivers, make strategic decisions that maximize value and mitigate potential risks. In fact, I always advice clients to conduct a business valuation at least once a year as part of a strategic plan, set goals and work towards increasing the enterprise value over time. Once you have had time to optimize the value drivers of your business, it is recommended you start preparation at least 3 months early so that potential issues that may arise during the transaction are addressed prior conducting due diligence . This not only increases the chances of selling the business faster, but it also may increase the investment value perceived by the buyer.
Tina: How can I get a premium value for my business?
Philip: The value of a business is equal to the value of the cash flows expected to be generated by the business discounted at a rate sufficient to justify the risk involved in generating those cash flows. To increase the value of your business, you can either increase the cash flows that the business is expected to generate, or decrease the perceived level of risk necessary to generate those cash flows, or both. To increase the anticipated cash flows, you can either increase revenues, decrease expenses, or both. To increase revenues, you can get new contracts, increase marketing, upsell to your existing customers, sell related products or provide related services to your existing customers, increase your hours of operation, or take a variety of other actions. Some business owners reduce the taxes they pay by reporting less revenue than they actually achieve. That may feel good while they are doing...
Tina: What are some questions to ask potential business appraisers before hiring one?
Eric: It is essential that the appraiser you select is able to effectively communicate information to others – including you. So ask them anything: “What are my options?” or “What are the steps in this process?” or “What will the key inputs be?” and see if their answers make sense to you. If they cannot answer these questions well, they probably will not be able to explain their appraisal findings in a manner that is meaningful and helpful to you. Experience (and good experience at that) and competence are qualifications you will need to discern, either through references or through obtaining a list of the appraiser’s publications and accomplishments. It is also a good idea to ask the appraiser about his or her professional designations – and that means appraisal designations. It is possible to hold each a CFA, CPA, MBA, and a PhD and still lack competence in the...
Tina: I am selling my business and am preparing to have my business appraised. Can I also use this appraisal in a courtroom, if needed? Why would an appraisal need to be used in a courtroom?
Bryan: Business appraisals usually have a stated purpose and a statement that the appraisal should only be used for that purpose. Most layman do not know that the value of a business can be very different depending on the purpose of the appraisal, so it is very important that the appraisal be used only for the stated purpose, or one runs the risk of utilizing a value that is inappropriate. For example, the value of a business for divorce purposes needs to comply with state legal precedents which could make it very different than one, for example, for estate tax purposes that needs to comply with the legal precedents in that area. Therefore, an appraisal prepared to establish the value of a business for sale should only be used in a courtroom if the issue at hand is the value of the business for sale. Appraisals are often used in...
Tina: Is there a difference between appraising a small and a medium sized business?
Derek: While there can be differences between small and medium sized businesses other than size, there are not nearly as many as compared to larger or even public companies. The biggest difference I see often relates to the strength of the business and its financial position. Smaller companies can frequently struggle with challenges that one would expect, ranging from financial resources to product development, and market strategy to operational efficiency. Medium-sized businesses may face the same challenges, but they have usually overcome issues like initial capital constraints, product strategy and lack of leadership. While the differences between small and medium sized businesses can still be numerous, I am assuming that these types of companies are still private and in their growth stage, so operational and competitive risks are still numerous and likely, and not that different from one another.
Tina: I am looking to hire a business appraiser. What makes a good business appraiser? Is it someone who is purely technical, or are other skills involved?
Trisch: A good business appraiser should have many personal attributes besides technical ability. Through proper training, appraisers learn what they need to learn to complete a proper valuation and how to apply all the information received from the business owners to the correct formulas, etc.; but there isn’t a step in the training process that helps appraisers with the psychological side of the field of business valuations. Though the attorney representing the business owner is more often than not the appraiser’s client, I often find myself dealing directly with the business owners involved more than the attorney. I, personally, like to determine and/or initiate chemistry with the client, and/or party involved, during an initial one to two hour meeting. During this time, I will discuss the processes involved in the valuation but I also get to know the individuals and make a personality connection. This helps in the success rate...
Tina: I own a vehicle repair shop and am preparing to sell my business. Is it necessary to find a business appraiser that specializes in my industry?
Drew: While previous appraisal or transaction advisory experience in an industry is desirable if a business owner wishes to engage a sell-side valuation expert, it is not by any means imperative. The most critical characteristic a business owner should seek when engaging a business appraiser is the overall experience of the valuation professional and her/his firm. Most seasoned business appraisers possess experience in dozens, if not several hundred industries serving valuation clients.
Tina: What role does a business appraisal play in exit planning?
Jerry: Before you can offer your business for sale you must determine a reasonable asking price. The only way to set the price is to perform a business appraisal. This must be performed by a professional who has been trained in appraising of business. If you do not know what the value is, you cannot accurately set a market price that attracts buyers to purchase your business. Also, in preparation to sell, you must make sure you really want to sell and what your exit strategy will be. Clearly know why you are selling and be prepared to communicate that reason to a buyer without hesitation. Have a transition plan for your next steps, whether it be retirement or another endeavor.
Tina: Is there a difference between an “appraisal” and a “valuation”?
Joshua: Generally speaking, and as far as our clients are typically concerned, there is no difference between an appraisal and a valuation. Both terms are frequently used interchangeably by both clients and professionals alike. However, I read a book a few years ago, "The Business of Business Valuation", which in my opinion best illustrated what the difference was from a theoretical standpoint. An appraisal is the assignment of value to tangible assets such as equipment and real estate. A valuation is the assignment of value to intangible assets such as a business interest or intellectual property . Others may have their own opinions, but that is the simplest way I have found of explaining the difference.
Tina: How many years of financial data do you need to appraise my business?
Michael: We usually ask for at least 5 years of historical financial data. However, sometimes a business may not have been in business for 5 years. In that case we would ask for all financial data since inception as well as financial projections for the next 5 years as a valuation of a start-up or early stage company usually cannot be based upon the first few years of a company's existence. In other cases, 5 years may not be enough to represent a normal operating cycle for a business. Construction companies come to mind if you consider the great recession and the number of years it has taken for the construction industry to rebound. So you may need to go back as much as 10 years in order to develop a normalized cash flow for a particular company. As we like to say in the business valuation profession, it is...
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