BV FAQ About Business Valuation

• What is the American Society of Appraisers?

  The American Society of Appraisers is an organization of appraisal professionals and others interested in the appraisal profession. International in structure, ASA is the oldest and only major appraisal organization representing all disciplines of appraisal specialists.  The society originated in 1936 and incorporated in 1952.

  The society is dedicated to the benefit of the appraisal profession. It is one of eight major appraisal societies that founded The Appraisal Foundation, a national nonprofit organization created to establish uniform criteria for professional appraisers. Since 1989 The Appraisal Foundation has been recognized by the U.S. Congress as the source for the development and promulgation of appraisal standards and qualifications.

  Each designated member of ASA has earned a professional designation in one or more specialized areas of appraisal. To receive the a designation, the appraiser must pass intensive written examinations, submit representative appraisal reports for peer review and be screened for his or her ethical behavior.

  To qualify for the Accredited Member designation (AM), an individual must have at least two years of full-time equivalent appraisal experience and a college degree or its equivalent.  To qualify for the Accredited Senior Appraiser designation (ASA), an individual must have a minimum of 5 years of full-time equivalent appraisal experience and a college degree or its equivalent.

  ASA has a mandatory reaccreditation process whereby designated members must regularly submit evidence of professional growth through participation in professional activities and continuing education. This ensures that ASA appraisers keep their knowledge up-to-date.

• What is the Business Valuation Discipline?

  Business valuators appraiser businesses and business interests of all sizes, from small proprietorships such as medical practices, to large multinational corporations. They also value specific intangible business assets such as patents, trademarks, employment agreements, copyrights, securities and goodwill. These professional appraisers prepare merger and acquisition studies, employee stock ownership plan feasibility analyses and other similar financial studies. They may be involved in appraisals performed for estate and gift tax returns, buy-sell agreements, securities litigation, equitable distribution in matrimonial matters and many other purposes.

• What is the Business Valuation Committee?

  The Business Valuation Committee directs the administrative functions of the business valuation discipline within the American Society of Appraisers.

BV FAQ Locating a Designated Business Valuator

• Where can I find a business valuator in my geographic area?

  ASA's Find an Appraiser (FAA) search engine can help you locate a designated ASA Member in your area that specializes in business valuations.  You may also use FAA's advanced search capability to find a business appraiser who specializes in a particular type of business, intangible assets and more.

BV FAQ Practice Procedures for Business Valuation

• How long should it take for an appraiser to complete a business valuation?

  The process of developing an appraisal and preparing an appraisal report can take several days to several months depending upon the size and scope of the business, the availability of the needed financial information, the availability of the client, the client's advisors and other reliable sources.

• How many appraisal methods should be used to properly value a business?

  The Uniform Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Foundation requires that all three approaches to value (Asset Based Approach, Market Approach, & Income Approach) be considered in every appraisal assignment; however a valuation may be developed using only one approach. In addition, within each appraisal approach, there are several different methodologies that should be considered. The answer as to how many methods should be used depends upon the scope of the assignment. In general, utilization of more than one method tends to give added credence to an assignment and USPAP states that sufficient methods should be utilized by the appraiser to ensure a creditable work product.

• What are the most common methods for appraising a business?

  The selection of appraisal methods depends upon the use of the appraisal and the scope of the assignment. Common methods include the income approach, the market approach and the asset based approach.

• How long is a business appraisal good for before it needs to be updated or redone?

  The determination of value for a business is always done as of a specific date; however, the final opinion of value most always considers historical information as well as the future projections about the subject company and its industry. Each day there could be slight modifications of value due to changes in the capital structure of the company; however, in general practice, if there are been no significant changes in the operations of the business or its capital structure, annual updates may satisfy most uses of the appraisal report.

BV FAQ Professional Appraisal Fees

• How does a business valuator determine their appraisal fee?

  In general, business valuation fees are similar to other professionals in the legal and accounting fields. Appraisers usually quote their fees either as an hourly rate, which can vary depending upon the level of expertise of those working on the assignment, or as a flat fee for the appraisal report.

• What does a business valuator charge for providing litigation support services?

  Almost all appraisers quote their fees for litigation support, such as testifying as an expert witness or reviewing another appraiser's report, on an hourly basis.

BV FAQ Purpose and Use of a Business Valuation

• What are some reasons I might need to appraise my business?

  The Purpose and use of an appraisal plays a large part in determining the scope of the assignment, the type of appraisal to be conducted, the type of report to be completed and the methodologies to be utilized. USPAP Standards and most standards promulgated by professional appraisal organizations require that the Purpose and Use of an appraisal be stated in the appraisal report. Business appraisals can generally be categorized into three groupings:

  • Transaction based mergers, acquisitions, divestitures, ESOP's, buy-sell agreements, exchange ratios, roll-ups, leveraged buyouts, initial public offerings, fairness and solvency opinions and debt and equity financing.
  • Tax based gift and estate taxes, estate planning, S corporations conversions, charitable contributions, creation of family limited partnerships, ad valorem taxation and the granting of stock options.
  • Litigation based divorce, condemnation, bankruptcy, shareholder actions, breach of contract and a variety of damage determinations.

• Can a value be placed on a company logo, its' website and the tenure of its' work force?

  Yes, these are intangible assets that are frequently appraised by business appraisers utilizing standard appraisal methodology.

• Does a small family business need an appraisal?

  Small family businesses often need business appraisals for many of the same reasons large companies need appraisals. Estate planning and gifts of ownership interest are frequent uses of an appraisal for a family owned business.

• Can a business valuator appraise the real estate and machinery & equipment for my company?

  Appraisers tend to specialize in specific appraisal disciplines which fall into several categories (often with many sub-categories within each).

  • Business Valuation
  • Real Estate
  • Personal Property to include Machinery & Equipment and Gems and Jewelry

  Appraisers should be qualified to conduct an appraisal by virtue of their education, experience and professional designations. Professional appraisal organizations typically specialize in providing education and professional designations for their members who meet the minimum requirements. It is a violation of The Uniform Standards of Professional Appraisal Practice (USPAP) to accept an appraisal assignment without having the necessary credentials to conduct the appraisal without so informing the client.

• What is intellectual property?

  Intellectual property is considered an intangible asset which (for valuation purposes) must have the following characteristics:

  • Have a legal existence
  • Have an economic substance
  • Can be legally transferred
  • Have a practical business reason
  • Are actually used (or used up) in normal business operations
  • Can be associated with a determinable royalty rate or other transfer pricing

  Examples of intellectual property include trademarks, trade names, books, recordings, computer software, etc.

BV FAQ Qualifications of Business Valuators

• What type of background do I need to become a business appraiser?

  The business appraisal profession is a challenging and rewarding profession requiring substantial training, experience and dedication to excellence. The appraisal profession in general is a fragmented industry made up mostly of small appraisal firms specializing within one or more appraisal disciplines. There are a few large national firms that conduct business appraisals throughout the U.S. and other countries. Most, however, are small local or regional firms who often specialize in specific size or types of businesses. A large portion of the appraisal business is for litigation and/or taxation issues which are often challenged in court. Therefore experience, education and professional designations set apart those who have the necessary education, experience and credentials to properly conduct business appraisals from those who conduct business appraisals as a sideline to other business lines they conduct.

• Do business valuators specialize in the types of businesses they appraise?

  While there are a few appraisal firms that specialize in appraising specific types of businesses, such as medical practices, utility companies and mineral related companies, most business appraisers handle a vast variety of business types ranging from small to publicly held companies. The education and experience of the appraiser often dictates the types and size of businesses handled.

• How do I get started in business valuation?

  Business valuators come from many walks of life with no one specific background being required. Today, many people in the profession have come out of college with advanced degrees in accounting or finance and joined established appraisal firms for training in business valuation. Others have gotten into conducting business appraisals through experience in related fields such as business brokerage, accounting and other appraisal disciplines.

  For someone recently graduating from college with a business degree or persons with a strong financial background, the quickest way to get into the profession and earn a living is to join an existing business appraisal firm who can provide the necessary training and support to ensure that you gain valuable education and experience needed to conduct business appraisals that will meet the requirements of the clients, governmental agencies, courts of law, the Appraisal Foundation and professional appraisal societies such as ASA.

• What type of income can I expect to earn as a business valuator?

  Due to the necessary experience and educational requirements necessary to conduct business appraisals, Business valuators are among the highest paid within the appraisal profession. A typical appraisal company will employ clerical support staff, financial analysts and professionals appraisers. Appraisers usually quote their fees either as an hourly rate, which can vary depending upon the level of expertise of those working on the assignment, or as a flat fee assignment. Most all appraisers quote their fees for litigation support, such as testifying as an expert witness, on an hourly basis.

  In general, business appraisal fees are similar to other professionals in the legal and accounting fields. Appraisers who work for an appraisal firm often do so either on a salary basis or a sharing arrangement based upon the total fee for the assignment and contribution of the appraiser to the assignment.

• What appraisal credentials should I expect a person to have to conduct a business valuation?

  As in most any profession, education and experience are the core factors that set business valuators apart. No governmental agency requires that business appraisers be licensed; however, most business appraisers belong to one or more professional appraisal organizations that award professional designations based on educational, experience and peer review. The following is a brief review of the professional designations awarded by the most recognized appraisal societies:

  Organization	Designations	Description of Requirements
  American Society of Appraisers	AM Accredited Member	College degree, 2 years appraisal experience, complete 4 courses & exams and peer review of appraisal reports
  	ASA Accredited Senior Appraiser	Completion of all the above, plus an additional 3 years of appraisal experience
  	FASA Fellow	Met all the above qualifications, plus voted into the College of Fellows based on leadership and professional contributions
  Institute of Business Appraisers	CBA Certified Business Appraiser	College degree, completion of 1 appraiser course and exam, peer review of 2 appraisal reports and completion of at least two appraisal assignments
  	MCBA Master Certified Business Appraiser	Met all the above requirements, plus 10 business years of practice experience, credit for published writing or lecturing and references from 4 other CBAs
  	FIBA Fellow	Met all the above requirements, plus voted into the College of Fellows on the basis of leadership and contributions to the appraisal profession
  National Association of Certified Valuation Analysts	AVA Accredited Valuation Analyst	Business degree, completion of analysts exams and 2 years experience or have performed 10 or more business valuations
  	CVA Certified Valuation Analyst	College degree, completion of analysts exam, completion of one course and exam and must be a CPA
  American Institute of Certified Public Accountants	ABV Accredited in Business Valuation	AICPA member with CPA Business Valuation license, one day exam, involvement in 10 business valuation engagements
  The Canadian Institute of Chartered Business Valuators	CBV Chartered Business Valuer	Business college degree, completion of 6 valuator courses & exams, and 2 years of full time experience
  	FCBV Fellow	Met all the above, plus elected by members as a Fellow

• What type of firms typically perform business valuations?

  The type of firms conducting business appraisals is less important than the credentials of the person(s) conducting the appraisal. Firms that often conduct business appraisals and provide litigation support either as a full time endeavor or on a part-time basis include:

  Full Time Appraisal Firms	Typically handle a large variety of appraisal assignments involving litigation and taxation issues.
  Business Brokerage Firms	Typically handle transactions involving actual sales of businesses or business ownership interest, often in a less formal environment than issues regarding litigation or taxation.
  Accounting Firms	Tend to handle appraisals involving taxation issues and some litigation.
  Economic Consulting Firms	Tend to conduct assignments involving economic damages, employee compensation disputes and wrongful death issues.

BV FAQ Resources for Business Valuators

• Where can I find articles on the subject of business valuation?

  ASA's Business Valuation Committee publishes a quarterly technical journal "Business Valuation Review (BVR)" which contains all types of information on business valuations.  Visit the BVR website to obtain specific articles from the Journal or for subscription information.

• Where can I get information regarding educational courses for business valuators?

  ASA offers several fundamental and advanced BV education courses.    

• Where can I find information about "Rules of Thumb" for valuing businesses?

  Some industries have "Rules of Thumb" about how to value companies in their industry; however, "Rules of Thumb" are usually quite simplistic. They fail to differentiate either operating characteristics or assets from one company to another. On one hand, if such "Rules of Thumb" are widely disseminated and referenced in the industry, they probably should not be ignored. On the other hand, there usually is no credible evidence of how such rules were developed nor how well they actually comport to actual transaction data. Consequently, "Rules of Thumb" rarely, if ever, should be used without other, more reliable valuation methods.

  Sources of "Rules of Thumb":

  Desmond, Glenn M. Handbook of Small Business Valuation Formulas and Rules of Thumb, 3rd ed. Camden, ME: Valuation Press, 1993.
  West, Thomas L., ed. Business Reference Guide, 9th ed. Concord, MA: Business Brokerage Press, 1999.

BV FAQ Standards & Code of Ethics

• What practice standards and/or code of ethics are business valuators required to follow?

  In general, the Appraisal Foundation has developed standards for all appraisal disciplines through the Uniform Standards of Professional Appraisal Practice (USPAP). Standards 9 and 10 of the USPAP Standards apply specifically to business valuation. Appraisals that will be utilized by lending institutions backed by federal agencies are required to comply with USPAP. ASA requires their members to follow USPAP guidelines regardless of the use of the appraisal.

  ASA has developed practice standards and code of ethics for their members to follow when conducting business valuations. The Business Valuation Committee has developed its own set of standards for BV members to follow.

  Other governmental agencies that have developed appraisal regulations or guidelines that impact business appraisers and business appraisals include:

  • Revenue Rulings promulgated by the Internal Revenue Service
  • The Department of Labor has developed regulations applicable to appraisals involving employee benefit plans

• Has the government established any standards with regards to valuing businesses?

  Government agencies or agencies regulated by the governmental include the following:

  • The Appraisal Foundation - The Financial Institution Reform, Recovery and Enforcement Act (FIRREA) makes compliance with USPAP mandatory for all federally related real estate transactions. Although not currently mandatory for personal property and business appraisals, USPAP has been adopted by many of the major appraisal organizations in North America and has become widely recognized as the generally accepted standards of appraisal practice.
  • The Internal Revenue Service has developed numerous standards and guidelines with regard to valuing businesses applicable to valuations involving taxation issues that include employee benefit plans, estate planning, income taxes, and allocation of assets for depreciation and amortization.
  • The Department of Labor has developed guidelines required to be followed when conducting appraisals involving employee benefit plans.

• Does the Uniform Standards of Professional Appraisal Practice (USPAP) apply to business valuations?

  In general, USPAP serves as a standard for all appraisal disciplines. Standards 9 and 10 apply specifically to business valuation. Appraisals that will be utilized by lending institutions backed by federal agencies are required to comply with USPAP. ASA requires its members to follow USPAP guidelines regardless of the use of the appraisal.

• Where can I get information about the Uniform Standards of Professional Appraisal Practice (USPAP)?

  The Appraisal Foundation
  1029 Vermont Avenue, N.W., Suite 900
  Washington, DC 20005
  202-347-7722

  www.appraisalfoundation.org