Appraising Small Businesses

Editor's Note: This story, taken from the WRE online library, was first published in Fall 2005 and updated for publication by author Manning (but not much). "Some things do not change and basic business valuation procedures is one of them." Manning is retired in Canada and reports that he spends his time writing articles for a variety of trade and professional publications on business matters- when he's not golfing in the summer or curling in the winter.

Next Big Thing: Appraising Small Businesses

By Lloyd R. Manning
 

Not that many years ago Xerox and others were harshly criticized for not entering the small copier business. Headlines read: "The millions no one wanted." It was only after the Japanese inundated the small copier market that American companies woke up to realize they overlooked a fortune, one that should have been theirs. Are real estate appraisers following the same course? I believe they are.

Many appraisers scramble to land small residential assignments or cut their fees for a Mickey-Mouse commercial job, which often winds up being no better than a break even. Yet many appraisers ignore thousands of dollars in fees available for valuing small businesses; work that is plentiful and ready for the picking. Once you develop a clientele, there is no reason why you cannot annually bill over $200,000. (In my last few years of practice I did, just me and a part-time secretary.)

When asked why they don't pursue this work, appraisers typically offer the same responses: "I don't know anything about appraising businesses; I never did it before; I don't know how to properly value a business; my office is not geared up for that; it's not my field; I'm making all the money I want doing what I am now doing."

Every reason is valid, particularly the one about making enough money. But isn't a warehouse, an office tower or an apartment complex a business? Certainly it is. All have land, a building, equipment, income, expenses, profit, and at times, goodwill. From the real estate appraiser's perspective there is very little difference, just a few quirks.

Just do It

Accountants will tell you that only they are qualified to undertake business valuations. Don't believe it!  It's not true! A well-skilled appraiser is as qualified to undertake the appraisal of a small business as any MBA or CPA. If anything, you are better equipped. You are trained in the valuation of hard or capital assets, which comprise most of the value of most small businesses. Accountants are not. (This does not apply to major corporations or situations where tax consequences have a major impact on the value of the business.)

Appraising businesses always comes down to applying the basic rules of estimating value that never change. You learned how to appraise homes and commercial properties and this is no more difficult. As far as the office not being geared up, there is nothing to gear. You don't need high-priced office furniture, a big board room, a bank of computers or an army of attorneys and accountants by your side. Business appraisal is done the same way and applies the same techniques that you already know or can learn. It just takes getting out and doing it.

The number one reason to appraise a business is to establish Market Value. Your client can be a seller, buyer or lender. Each year in the USA over $4 million small businesses change hands. Very few are professionally appraised. Many buyers make mistakes. They pay far too much or buy a business on the decline, has no potential for growth or is obsolete by every standard. Many will pay good money for good will that's not very good! And many will sell for far less than market value, often for the wrong reasons. 

Going Concern Value Estimates are also required for many transactions: mortgaging, financing or renewal of credit lines where there is no sale; foreclosure and bankruptcy; condemnation; litigation and disputes; as the basis of employee stock option purchase plans; partner or shareholder buyouts; establishment of values for buy and sell agreements; divorce by husband or wife, inter-family disputes; estate settlements and beneficiary distributions; disputes with the IRS; disputes with municipal-county taxing authorities; insurance claims and settlements and many others.