Monday, March 25, 2013

Buainess Appraisal Reports Clarified

Most people would think that the business appraisal sector would be a very organized group, but they are not. I recently reviewed an article on a business appraisal technique by a writer from a Business Appraisal Association and half the professional appraisers responding did not agree with the writer.

First off, there is not a single standard method of appraising a business and none of the individual methods used by its self provides an accurate appraisal. There is also a vast divergence of quality business appraisers and business appraisal reports. I classify them into six different groups.

1.      The dedicated professional appraisers who mainly do large private corporations and charge large fees to do these complicated assignments. They understand the complexity of business appraisals and provide quality work.
2.      The typical small business appraisers may use four or five different methods in the same report and give each method a percentage weight. How they come up with the different weights I’m not sure. It seems as if they have already decided on the appraised value and adjust the weight percentages to justify their final appraisal number.
3.      The smoke and mirrors group will fill the appraisal with all kinds of useless reports and complex terminology. I have seen reports that are so grammatically and mathematically complex that they are totally impossible to understand. The writers rely on impressing their clients with their brilliance, hoping the reader can’t understand the report enough to realize they wasted their money. These appraisals tend to be extremely inaccurate.
4.      There are the on line groups charging very little for an appraisal. They can’t afford and probably don’t spend much time analyzing the business, its Financial Statements, Tax Returns and other important documents. The sample appraisals I have seen were inaccurate. I spend much more time analyzing the business and its financial documents than I do writing the report. A business appraisal is not an on line fill in the blanks type of report. It takes a knowable experienced expert who will take the time to truly analysis the business.
5.      Those that use the capitalization rate and rule of thumb methods are providing their clients with the average value of all the business used to determine the capitalization rate or rule of thumb numbers. Each business is different and an appraisal has to address the specific parameters of the business being appraised to be accurate.
6.      The blended method uses a combined report using the cash flow, asset and market value approaches to determine the business value. This blended method looks at all the elements that create value in a business and provides an appraisal unique and accurate for each business appraised. This method consistently works. Check out my blog for more information on this method.

Most of the inaccurate appraisals I have seen appraised the businesses with a much higher value than they were actually worth. Some of the values were three times higher than the actual value. It also seems like the larger and more complex the reports, the less accurate they were. Quantity over Quality.