Business Appraisers Law and Legal Definition
Appraisers are agents who establish the value of businesses, personal property, intellectual property (such as patents, trademarks, and copyrights), and real estate through a process known as valuation or appraisal. The demand for valuation of business enterprises has increased in the last several years in many industry sectors for a variety of reasons, including the rise in corporate restructuring, rising incidences of litigation (such as divorce, in which value and possession of closely held businesses may be hotly contested), changing employee-compensation packages, continued purchases of existing businesses, and the proliferation of employee stock ownership plans (ESOPs), which require annual appraisals of value. Indeed, the dramatic surge in popularity of ESOP plans accounts for a significant portion of the increase in appraisal/valuation activity across the American business landscape.
Problems in the Business Appraisal Industry
Beginning in the late 1990s but continuing still, the appraisal industry began a process of change and consolidation driven primarily by changes in the real estate sector. Steve Bergsman, writing in Valuation Insights & Perspectives, provides a summary: "There was a time not so very long ago, at least as recent as the early 1990s, when the appraisal industry—residential and commercial—was reliant on the mortgage lending business. By the middle of the last decade, however, a number of crosscurrents began to buffet that type of work … competition from other appraisers and technology. First, competition caused pricing to flatten; even banks admit there have not been rate increases in a number of years. Second, new technologies, particularly automated valuation models, appeared, and more and more data, i.e., historical records of home sales and multiple listing services, became widely available on the Internet." As a consequence of these developments, real estate appraisal has become a much less profitable part of this business. Survivors of the shake-out, however, have found new opportunities in business valuation and litigation.
Finding a Qualified Appraiser
But while the business appraisal industry is in a state of transformation, consultants hasten to add that many qualified appraisers do exist—and can be of valuable service to small business owners who take the trouble to investigate the merits of various appraisers. Keys to finding a good appraiser include the following:
- Network—As one tax and estate-planning attorney told Inc., "Ask around, and then ask around some more. Talk to people in your geographical area, even if their businesses aren't just like yours; talk to people with similar businesses, even if they're not in your geographical area. Appraisal is a fraternity, and once you know who's in the fraternity, who's respected, you'll know who to go to. And, very importantly, if the reason you're looking for a valuation has anything to do with taxes, or is likely to somewhere down the line, find out who's respected by the Internal Revenue Service—who do they use to do their valuation work?"
- Look for experience and education—Appraisers with significant experience and a good educational background (MBA or CPA) are far preferable to those who are limited in either area. Moreover, some analysts believe that the appraisal industry is moving towards increased specialization (office buildings, hotels, professional practices, retail outlets, etc.); if possible, find an appraiser who is familiar with your business area.
- Recognize that valuations vary from client to client. Appraisals of business can vary significantly in terms of their cost, both in terms of time and money. Learn about standard fees imposed on business that most resemble yours in terms of size, health, and situation. "The vicissitudes of most projects—the standard ESOP valuation being an exception—often make it impossible to charge on a flat-fee basis, or even give a responsible estimate of hourlies," warned Nell Margolis in Inc.
- Find a licensed appraiser—The relative ease with which people are able to secure certification in the appraisal business has drawn fire, but it does establish a ground floor of presumed competence.
SEE ALSO Buying An Existing; Selling A Business
Bergsman, Steve. "The Changing Composition of Your Overall Client Base." Valuation Insights & Perspectives. Winter 2003.
Mobley III, T. Alvin. "Defining and Allocating Going Concern Value Components." Appraisal Journal. October 1997.
Semanik, Michael K., and John H. Wade. The Complete Guide to Selling a Business. AMACOM, 1994.
Tuller, Lawrence W. Getting Out: A Step-by-Step Guide to Selling a Business or Professional Practice. Liberty Hall, 1990.
Yegge, Wilbur M. A Basic Guide to Buying and Selling a Company. Wiley, 1996.
Hillstrom, Northern Lights
updated by Magee, ECDI