Three Critical Things to Consider Before Hiring a Business Appraiser

By Max Friar

businessappraisalIn the past few weeks, Calder Capital has had the opportunity to review a variety of business appraisals conducted for individuals and business owners who are considering or have made life-changing decisions. More or less, Calder has been asked to give a second opinion. We have been astounded by the poor quality and erroneous conclusions reached by these appraisers, so astounded that this blog post is essentially writing itself. We are distraught by the quality of the advice that people are relying on, and we HAD to set time aside to get the word out.

Here is our message to “appraisers”: If you are not in touch with the actual marketplace, with buyers and sellers making offers and negotiating transactions in real life, proceed with caution. Over the past five years, while theoretical business valuation has remained consistent, the marketplace has changed: the financial crisis, banking rules, more owners retiring/selling, consumer trends, etc., have shaken things up and shifted the dynamics. Your clients are company owners or entrepreneurs who are making HUGE decisions about their lives here.  Theory alone is not going to work for them. If you are not in the market, then how can you weigh in with wisdom about the market method?

What are three critical things to consider before hiring a business appraiser?

  1. Does the appraiser sell businesses? When was the last time the appraiser marketed and sold a business? When you are selling your house, do you use a realtor or an appraiser? Yes, databases of comparable transactions matter and help, but being in touch with the current marketplace is necessary. Knowing what buyers, sellers and banks are thinking and doing today is paramount. If your appraiser may never be called to perform on the valuation that they present, what is their incentive to make sure it is as accurate as possible? How do they know it’s really accurate? How do you know that they aren’t trying to make you happy? Or justify what you want by tweaking a formula? Every one of the six valuations that we have reviewed recently was performed by an individual or firm that would never be responsible for bringing the dough. As you may have already guessed, every one of the valuations was on the very high side – sometimes inflated by millions of dollars! This type of advice may make your client smile today, but at what price? Your client is planning their future with a black storm cloud looming over them.
  2. Does your appraiser follow the guidelines of the National Association of Certified Valuators and Analysts? NACVA is the premier association for appraisers, and their methodology is widely recognized as the standard.
  3. Does your appraiser have the most accurate information possible to work with? Knowledge is power. If your appraiser is relying solely on financial statements and tax returns, the value of the appraisal will not be accurate. Your appraiser should interview you and provide questionnaire(s) for you to fill out to truly understand how you operate your business, how you spend money, how you pay yourself, and how the cash flows.

While there are many additional things to consider, these three are preeminent. They are more important than gray hairs, company names, and letters following names. If you plan or even hope to sell your business someday, you must know its true value.

If you are interested in obtaining a quality valuation, or if you have questions, please contact us:

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