Appraiser Talkback Blog

Editor’s Note: Here is a primer on business appraising taken from the WorkingRE.com library. The need for these non mortgage-related appraisals is growing at an unprecedented rate as the ownership of private businesses changes hands in record numbers. See the sidebar (at the bottom) for more.

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 four 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.

How much is $10 Trillion?
A survey conducted by The Wall Street Journal some time back indicates that during the next 10 years over $10 trillion will be passed to the next generation, a substantial part of which will be in the shares and assets of family-held businesses. Now well underway, this is the largest intergenerational transfer of wealth from parents to children in history. The baby boomers are graying. Those who started businesses in the 1960s and 1970s now want out. To avoid fights with the IRS, assets must be transferred at fair market value, which requires an appraisal.

No one knows for certain how many persons or companies need the help of a qualified business appraiser. Across the country it is probably hundreds of thousands. Still, most appraisers don’t value small businesses. They tell all who will listen: “We are Real Estate Appraisers. Period!”

You Got What it Takes
You say you don’t have the skills? Yes, it’s nice to have an MBA or be a CPA but neither is required. You must have an understanding of the appraisal process and a working knowledge of business fundamentals. You do not need to know how to run the subject enterprise to establish its going concern value. All that goes into the discipline of small business appraisal can be mastered by anyone with a high school education.

Sadly, thousands of dollars in fees are being passed up because real estate appraisers consistently turn away these assignments. Yet there is nothing bewildering or complicated about appraising small businesses. It is simply a broadening of the valuation principles you have already learned. Understanding the fundamentals of business appraisal and the “how-to-do-it” procedures provided by various courses will place you at the starting gate for more assignments and substantially increased earnings.

About the Author
Lloyd Manning is a retired commercial and investment property appraiser. He has written several books and articles on the topics of commercial real estate and business appraisal. 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.

Sidebar
A recent white paper by the National Association of Certified Valuation Analysts predicts that in excess of 1,000,000 privately held businesses will change hands within the next 18 months and many of them (approximately 66%) will be sold and require the assistance of valuation professionals. “There will be over 800,000 middle market businesses with an estimated total value of $3.3 trillion disposed of between 2011 and 2029. On average, about 43,000 a year from 2011 until 2029, and that is just the baby boomers and just the middle market.” (Find the white paper at WorkingRE.com: Sidebar; Business Appraising Whitepaper).