The Business Appraisal Helps Build Value While Protecting Your Equity and Invested Capital

The business appraisal is one of the most misunderstood documents used in business today.  What it is, how it is written, and the many ways it can be used to settle one of the ever-present realities of the marketplace.  That reality is that there can be more than one value of the same clearly defined item of property.  Most business decisions begin with diverse parties expressing differing opinions of value in the context of a particular issue.  The often-quoted expression “value lies in the eye of the beholder” is not very useful when there is a legal or financial need for a single definition of the value of a specific property, in one context, and on a specified date.

The business appraisal also has another use.  That of a management planning document used to build long-term value and sustainable profits.  A tool that helps owners fulfill their purposes for owning a business.

Despite these issues, the business appraisal is gaining recognition as a useful method of bringing diverse parties to an agreement of value in a wide array of situations.  The appraiser is a non-advocate of either party.  The report is an impartial, supportable analysis of value that can bring conflicting parties together.

Its conclusion of value must be defensible in the sense that it must be able to survive the scrutiny of many parties.

Benjamin Franklin once said:  “I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.”

From my perspective as a long-time practicing business appraiser and business broker, I understand the relevance of his statement.  I can tell you that many of my cases over the years involved issues that were complicated by the involved parties who each held different opinions of the value of a business interest. The clients in some cases were friendly with one another and in others were either in litigation or threatening to sue to defend their opinions of value.

The underlying issue in many cases was the diversity of views held by the parties that could not agree on the amount of the ownership interest in question.

The solution to the standoff should have been evident at the time.  What they needed to break the deadlock was an impartial and supportable opinion of value provided by a disinterested third party. A real understanding of the appraisal process was not as common as recently as 30 years ago.  It is believed that the S&L Crisis of the 1980s was one of the trigger events that increased the public’s need for third-party value opinions in matters related to real estate and business transfers.

While we look back to that time, we can see that the use of impartial, third-party opinions should have been obvious.  But, it wasn’t! It wasn’t always likely that the parties involved would look outside of their particular relationships to retain the services of a business appraiser to settle their differences.

The reasons were commonly given for this past lack of perspective related to the public’s limited recognition and understanding of the appraisal process and the basics of economic and financial principles.  The business appraisal remains one of the most misunderstood business documents used in business today.  What the public seems to understand more today is that business appraising is NOT a casual process, but a structured and definitive one—a process that has many uses and benefits!

Published in AAC, Best Practices