By Matt Kaufman, ASA and Laura Lemco, CVA
A business appraisal is a report detailing the analysis involved to determine the value of the business as a whole – its assets, procedures, proprietary information, staff, management – all the parts of and influences on the business that interact to produce a benefit stream. It is important to determine the purpose of an appraisal to decide the best standard of value. As you can imagine, a business that must be liquidated because of a lawsuit has a different standard of value than a business that has several potential investors.
Because privately held businesses are not traded on the stock market, a valuation requires an independent appraiser to assess factors outside and inside the business to reach a conclusion of value. The IRS Revenue Ruling 59-60 requires a careful analysis of the nature and history of the business, the general economic outlook, industry outlook, financial condition of the business, earnings capacity of the company, goodwill or other intangible values (such as patents, procedures, proprietary information), the stock (and attached rights) being valued, as well as the market price of stocks of similar businesses.
An appraisal is dependent on the information provided and the analysis used to determine an opinion of value for a specific purpose on a specific date. Both the quality of the information and the experience and credentials of the appraiser will affect the reliability of the conclusion.
Common Uses: Transition planning, buying, selling, estate planning, legal requirements, tax issues, management planning and decisions.
Asset (Machinery, Equipment) Appraisals
An Asset (Machinery, Equipment) Appraisal is an opinion of value developed of a list of assets. This can also be called an FF and E appraisal for Fixtures, Furniture, and Equipment. This list can be provided by the client or developed by the Appraiser. The Appraiser would normally inspect the assets and determine condition, vintage, special add-ons, capacity, and other characteristics. During the COVID-19 Pandemic it and other select times when the assets are not able to be inspected this may be completed as a “desktop” or limited scope appraisal. Where the appraiser is reliant upon the list being complete, accurate, and detailed enough to complete the assignment.
The appraiser must consider three approaches to value Cost, Market and Income. The Cost Approach is what it would cost to purchase new and then apply functional and economic obsolescence and physical deterioration. The Market Approach is what it would cost to purchase a like item on the used market and apply the same adjustments in the Cost Approach to the comparable to make it the same as the subject property. The Income Approach is rarely used on an Asset Appraisal as it is difficult to attribute an income to one specific piece of equipment. It can be done. The appraiser then must analyze which Approach is the most appropriate and indicative of the Value.
The Appraiser should consider the definition of value: cost new, fair market, orderly or forced liquidation, salvage and state the source.
The Appraiser should also consider level of trade. If you are buying full retail, direct from a distributor, from an auction, or a used equipment dealer,
The Appraisal should be well-developed, supported and reported, stating any hypothetical conditions, extraordinary assumptions, and limiting conditions. Further, it is best as we learned in elementary mathematics, show the work.
Common Uses: The common uses are the same as above, additionally, insurance, financing, donations, divorce, mergers and acquisitions, purchase price allocation, eminent domain, liquidations, and bankruptcy
In both cases, appraisals are not….
Future predictions – An appraisal is an opinion of value as of a specific prior date. Appraisals rely in information that is “known or knowable”, which limits them to the present or past dates.
Prices – While they should be closely related, a price is the amount of money a seller is asking, the amount a buyer offers, or a historical price paid. Appraisals state an opinion of value for a specific purpose, but the buyer or seller may have special motivations that influence price.
Advocacy – Accredited appraisers follow the standards of their accrediting agency. Appraisers advocate for is their professional work and opinion. Clients pay for an appraiser’s professional opinion based on facts and circumstances. In court cases, although they are hired by a client, the job of the expert witness is to assist the trier of fact (judge or jury) to understand the specialized details of a complex issue.
Appraisers spend a significant amount of time to evaluate each business or asset and the factors that influence their value. They use their experience and professional judgement to analyze the information available and produce a report that is readable and useful to the client and intended users. For more information about appraisals, you can visit www.appraisers.org. To schedule a free, confidential conversation about your specific situation and needs, please call Laura at (541)797-0630 (direct office line) or (303) 994-6919 (cell).