Business valuations are necessary for many reasons. Among these, some of the more common ones are:

• Acquisition of a business
• Allocation of purchase price
• Bankruptcy
• Buy-sell agreements
• Conversion to an S corporation
• Charitable contributions
• Divorce
• Estate tax
• Employee stock options
• Employee stock ownership plans (ESOP)
• Financial reporting purposes
• Financing
• Gift tax
• Goodwill impairment testing
• Litigation
• Maximizing shareholder value
• Merger
• Sale of a business
• Shareholder disputes
• Succession planning
• Transfer pricing

Nothing. These terms are used interchangeably. In the context of businesses, an appraisal or a valuation is the act or process of determining the value of a business, business ownership interest, security, or intangible asset.

There are a couple main factors to consider in hiring a business appraiser. The first is education and training. One of the best independent ways to gauge education is by certifications. A professional who has earned a certification has met the minimum requirements to obtain the certification, and generally must meet continuing professional education (CPE) requirements of the professional society to keep the certification. Most users of valuations are aware there are several designations available, but do not understand the various levels of difficulty in obtaining them. This can be confusing.

There are four professional societies offering valuation certifications. These as well as a summary of the more salient requirements for certification are as follows:

1. American Society of Appraisers: ASA’s senior designation is the ASA (Accredited Senior Appraiser) which requires that appraisers have 10,000 hours of business valuation experience, pass up to four levels of exams, pass a standards exam and an ethics exam, and submit two actual valuation reports for peer review. As such, it is one of the most difficult credentials to obtain. The junior designation is AM (Accredited Member), which has the same requirements as the ASA except it requires only 2,000 hours of experience. ASA generally focuses on the valuation of mid-sized and larger businesses.
2. Institute of Business Appraisers: IBA’s primary designation is the CBA (Certified Business Appraiser), which requires that appraisers have either 10,000 hours of business valuation experience or 90 credit hours of valuation education, pass one examination, and submit two actual valuation reports for rigorous peer review. An MCBA (Master Certified Business Appraiser) is a CBA with over fifteen years of business valuation experience who has been endorsed by his/her peers and holds multiple designations. The junior designation is the AIBA (Accredited by Institute of Business Appraisers), which requires 80 credit hours, passing one examination and submitting one valuation report for peer review. IBA generally focuses on the valuation of small to medium-sized businesses.
3. American Institute of Certified Public Accountants: CPAs can qualify for the ABV (Accredited in Business Valuation) designation by passing a rigorous exam and demonstrating experience in six valuations or have 150 hours that demonstrate substantial experience and competence. Prior to 2007, the requirements were to pass a rigorous exam and demonstrating experience in at least ten valuation engagements. The AICPA has recognized business valuation as a separate profession so that a CPA requires separate training and experience to value businesses.
4. National Association of Certified Valuation Analysts: NACVA members can qualify for the CVA (Certified Valuation Analyst) designation by completing an optional five day seminar, passing an examination, and submitting a take-home case study valuation report. This designation is available only to CPAs. NACVA also awards an AVA (Accredited Valuation Analyst) for non-CPAs. Prior to 2006, the proctored exam didn’t exist in the requirements for the CVA, so the only hurdle a candidate had to meet was to submit the take-home case study, which was a simple case study on the fundamentals of valuation.

In summary, while all have recertification requirements, only an ASA or CBA has undergone a stringent peer review of their work product; only an ASA, CBA, or ABV is required to have met specified levels of experience. So this suggests that if you are considering hiring someone without the more stringent designations, you may wish to question their background and see a sample of their work before hiring them. And given the ease of obtaining some of the less stringent designations, anyone performing valuations and not holding any designations should raise serious questions in the mind of the consumer.

The second main factor is experience. Not the experience just mentioned to qualify for a designation, but ongoing experience. Some who carry credentials may not work in the appraisal profession, but rather work in a profession peripheral to it– such as the legal, accounting, or business brokering professions. These professionals have other responsibilities, such as audit and tax work in the case of accountants, and therefore are only preparing valuations part-time. If you are going to rely on a professional’s valuation for serious financial decisions in your life, would you prefer they have the experience of someone who is part-time or full-time in the field? The answer is obvious! Only someone working in the appraisal profession full-time has the ongoing experience to provide highly credible work.

If you feel comfortable with your CPA providing the service after considering his/her education and experience in business valuation (See FAQ #3) and there are no conflicts of interest, then sure.

Bear in mind though that some CPAs may sell a client a valuation service on the fact that the AICPA has issued standards (called SSVS No. 1) and that he is forced to comply with these so the valuation will be of high quality. However, compliance with standards and intricate knowledge of valuation principles are not the same. A person can honestly and willingly comply with standards to the best of his/her ability, but that does not mean they arrived at a reasonable conclusion of value.

While most CPAs have achieved a high degree of knowledge in the area of accounting and tax matters, the majority of CPAs do not have the necessary expertise and training to perform business valuations. Consider some facts: As of January 2009, less than one percent of the approximately 350,000 CPAs who are members of the American Institute of Certified Public Accountants have the ABV designation. The valuation body of knowledge is not covered in college course work for an accounting major nor is it part of the CPA exam. Accounting skills and valuation skills are fundamentally different, although overlapping in some areas. Accountants look primarily at historical information and reporting of that information in compliance with generally accepted accounting principles for use by business owners, banks and others. Appraisers concern themselves with future income and cash flows as well as business risks, reading stock market data and analyzing merger and acquisition deals.

There are three acceptable scopes of valuation assignments as described by the standards of the business appraisal organizations.

Full Appraisal: The objective of an appraisal is to express an unambiguous opinion as to the value of the business, business ownership interest, security, or intangible asset which is supported by all procedures that the appraiser deems to be relevant to the valuation.

• Appraiser collects and analyzes all relevant information.
• All conceptual approaches deemed to be relevant by the appraiser are considered.

Limited Appraisal: The objective of a limited appraisal is to express an estimate as to the value of the business, business ownership interest, security, or intangible asset which lacks the performance of additional procedures that are required in an appraisal (also referred to as limiting the scope of work).

• Appraiser conducts only limited procedures to collect and analyze relevant information.
• Only those conceptual approaches deemed to be most relevant by the appraiser are considered.

Calculations: The objective of calculations is to express an approximate indication of value based upon the performance of limited procedures agreed upon by the appraiser and the client.

• Appraiser performs limited information collection and analysis procedures.
• The calculations are based upon conceptual approaches as agreed upon with the client.

Depending on the type of engagement, availability of information, cooperation from management of the company being valued, and the level of reporting required, it typically takes anywhere from 4 to 6 weeks to complete a full appraisal and less to complete a limited appraisal. Calculation engagements can take less than a week.

Fees for business valuations can vary widely depending on several factors, so the pricing is not as clear cut as perhaps other types of appraisals (real estate, equipment, etc.) Much of it depends on the type of company being valued, its size, the geographic market it serves, level of reporting required and other factors. Some of these factors have a bearing on the amount of research and analysis that is required to provide the appraiser with the necessary information to consider in concluding on a value. Among other things the appraiser considers the following: the nature and history of the company; the overall economy; the industry; the company’s financial condition; the company’s risk both quantitatively and qualitatively; the company’s future prospects, market based guideline companies, touring facilities, and interviewing management. Business valuations are time consuming.

Most appraisers quote a range of fees after obtaining the facts for a particular assignment while others either simply state a flat hourly rate or quote a fixed fee. It is a violation of ethical standards to be paid on a contingent fee. Expenses directly related to the assignment are billed separately. In any situation though, appraisers typically collect a retainer before beginning an assignment of somewhere between 50 and 75 percent and collect the balance upon completion. If a fee quote seems much lower than other quotes, you may want to consider if the appraiser is doing a thorough job for you or if he is taking shortcuts. If the valuation is challenged and it doesn’t perform its intended function, you may wind up paying much more to fix a problem that could have been avoided with some common sense.

We are happy to quote you a fee for your particular need with no obligation.

A valuation is valid as long as its methodology is sound and its assumptions hold firm. It could be a day, a week, a month, a year, or any time period, depending on the facts and circumstances of the situation. As a practical matter, this extends to a maximum of a year (in more certain times), when a valuation must be updated to reflect subsequent company performance and current economic/industry conditions. The old adage, “timing is everything,” very much applies to business valuation. In the extreme case, given 9/11, in 2001, the valuation of a hotel or an airline company was significantly different on September 10th as compared to September 15th.

There is no single method for determining the fair market value of a business or individual interests in its equity; the method depends upon the circumstances surrounding the business and its individual characteristics. Traditionally, the development of a fair market value opinion of a business enterprise and corresponding equity interest is based on the consideration of three basic approaches to value, after a full qualitative and quantitative assessment of the underlying business. Value indications derived through one or more of these approaches are then analyzed in order to formulate an objective opinion as to the fair market value of the equity interest under valuation. A brief description of the three approaches follows:

The Income Approach measures the value of a business based on the expected stream of monetary benefits attributable to the subject company. Generally, the present value of the income stream to be generated for the benefit of the shareholders over the business’ remaining economic life is determined. This approach assumes that the income derived from the business will, to a large extent, control its value.

The Market Approach arrives at an indication of value by comparing the company being appraised to comparable publicly traded companies or to comparable businesses which have been acquired in arm’s-length transactions. The market data is then adjusted for any significant differences, to the extent known, between the guideline companies and the company being valued.

The Asset Based (or Cost) Approach is a general way of determining a value indication of a business’s assets and/or equity interest using one or more methods based directly on the value of the assets of the business, less liabilities.

A business is valued either on the basis of its assets less its liabilities (asset approach) or on the basis of the benefits it generates, such as earnings or cash flows (income and market approaches). If a business is valued on the basis of its earnings or cash flows, then all of the equipment and various assets that are essential to the functioning of that business are embodied in the value of those benefit streams. Therefore, the value indicated by an income or market approach includes all of those tangible assets. Assets like extra cash, idle equipment, vacation homes, or other things not necessary to support the operations giving rise to the generation of sales and profits are separately valued and, in fact, added to the value of the business derived from income and market approaches.

This question is akin to a residential real estate appraiser driving by a house and telling you what he thinks it's worth rather than looking inside. Two identical and adjacent homes could have materially different values if one is in relatively poor condition on the inside and the other has undergone several renovations and additions that are not visible from the outside. The business valuation process is far more sensitive and complex than just plugging numbers into a computer software package or spreadsheet, requiring material professional judgment. For example, the numbers in a business, such as pre-tax profits, may need to be adjusted for certain factors such as excess compensation, market rent, and other things in order to arrive at an economic income to an investor. In addition, numbers do not reflect certain risks (e.g., dependence on a key person or on one customer) that would need to be factored in valuing a business. Therefore, just looking at the numbers and not having the appraiser go through the process can severely hurt the valuation user.

There are standards promulgated by five different entities. These are as follows:

1. The Appraisal Foundation: The Appraisal Foundation, a not-for-profit organization dedicated to the advancement of professional valuation, was established by the appraisal profession in the United States in 1987. They promote Uniform Standards of Professional Appraisal Practice (USPAP) standards as best practices for all appraisers working in the field. Compliance with USPAP is voluntary.
2. The American Society of Appraisers: The ASA is a professional society for appraisers and promulgates its Business Valuation Standards and code of ethics that members must comply with. In addition to its own standards, the ASA requires its members to also comply with USPAP.
3. The Institute of Business Appraisers: The IBA is a professional society for appraisers and promulgates its Business Appraisal Standards and code of ethics that members must comply with.
4. The American Institute of Certified Public Accountants: The AICPA is the premier society for CPAs. The AICPA has developed the Statement on Standards for Valuation Services (SSVS) No. 1 for its members to comply with who perform valuation services. In addition, all members must comply with the AICPA’s Code of Professional Conduct and code of ethics.
5. The National Association of Certified Valuation Analysts: NACVA is a professional society for appraisers and promulgates its Professional Standards that members must comply with.
   

It is noteworthy that most of the standards promulgated by each professional organization are essentially the same in spirit, if not to the letter. Terminology may vary slightly and there may be minor differences, but if an appraiser complies with any of the sets of standards, there should not be a deficient valuation rendered that can be blamed on faulty standards. Rather the fault may lie in the members’ failure to comply with the standards themselves. Members of each organization must comply with the standards of the organization as a condition of membership regardless of the designations they hold. Each organization regulates its members and takes action against a member for violation of its standards.