Before purchasing or selling a business, it is essential to determine the value of the targeted business. Without knowing the value of a business, a purchaser will not be in a position to make an informed offer. He or she will either overpay for the business, thereby starting behind the eight-ball from the inception of his or her ownership, or make a low offer that results in the seller accepting somebody else’s offer. Likewise, if the seller does not know the value of the business, the seller may accept a below-market offer when he or she could have received more money. Complicating matters, the value of a business changes depending upon the circumstances in which the parties are selling. For example, the value is different if the sale is a “fire-sale”, as opposed to if the seller wants to get out when the business is at its strongest.
This article will provide a brief outline of what to look for with respect to valuing a business. The first step is to choose the right appraiser. The safest course of action is to find an appraiser who is certified and in good standing with one or more of the organizations that offer business valuation certification. The following are professional organizations that offer such accreditation: (i) American Institute of Certified Public Accountants (Accredited in Business Valuation); (ii) American Society of Appraisers (Accredited Member and Accredited Senior Appraiser); (iii) Institute of Business Appraisers (Certified Business Appraiser); and (iv) National Association of Certified Valuation Analysts (Certified Valuation Analyst). Each organization requires different accreditation criteria, including the type of degree or license the appraiser must possess, the course/exam required and experience the appraiser must possess before achieving certification.
Before selecting a business appraiser, a person should obtain the individual’s specific qualifications and professional activities. It is important to consider the practice areas that the appraiser concentrates. He or she should be familiar with any laws that have an effect on valuation matters of his clients’ businesses.
Also, ask for a sample of one or two reports that the appraiser has previously written. (It is, of course, reasonable to expect that the report will be sanitized so that none of the appraiser‘s prior clients’ names and other identifiable characteristics are revealed.) This will enable you to determine if the appraiser can coherently memorialize his or her valuation. A report will not be of any use if it is incoherent. (This is especially the case if the valuation is for litigation purposes and the appraiser may be required to subsequently testify as your expertPosted in Business / Employment