Why an appraisal is critical to a Seller when selling their business | Andrew Rogerson's Blog

Why an appraisal is critical to a Seller when selling their business | Andrew Rogerson's Blog

August 2nd, 2010 by Andrew Rogerson | No Comments
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The best approach when selling your business is to make a list of all the items so there is no confusion about what is being sold. This includes isolating and reporting individually any real estate, inventory, fixtures, furniture and equipment, leasehold improvements, as well as assets that are not part of the sale.

Additionally, consider making a list of the current liabilities of the business and against that list, note whether it will expire when the business changes ownership, stays with the seller or will transfer to the buyer. Also, a better idea is to completely remove any personal or special items that will not be sold as part of business. This removes any ambiguity and becomes one less tension point in the transaction.

Once this is done, one of the first steps to selling the business is to get an appraisal on the business as a going concern. If you’re the owner of the business you may have an opinion about what the assets are worth but that opinion will not be acceptable to a genuine buyer. The best approach is to have a third party perform the appraisal for you.

There are a number of reasons to use a third party appraisal and these include that it provides confidence about the value of the business and the asking price. It provides an informed opinion about the business value so the seller can decide if the asking price will be enough for them to sell the business. Most sellers think their business is worth more so the valuation keeps the seller real with his price expectations and hopefully won’t take the business to market if they are not going to get a price that works for them. A business valuation also helps the seller see the business strength and weaknesses from a third party’s perspective and understand their tax situation. That is, the price the seller gets when he closes escrow doesn’t mean they get to put all that money in their pocket. The IRS wants their tax piece from the business sale and the business valuation helps informs the seller.

Another two reasons for a business valuation is that it puts one less strain on the transaction. There are often many deal points between the buyer and seller in a transaction. The more deal points and the more tension in the transaction the greater the chances it will not close escrow. As price is normally one of the biggest items, having a reasonable purchase price eliminates any tension and allows the focus to move to the terms and conditions of the sale. Also, if the business transaction requires the buyer to obtain third-party finance, the business valuation will help all parties work through that scenario. Some lenders will require their own appraisal that they order; others will work with the third party appraiser if the skills and certifications of the appraiser meet their standards as well as the quality of the appraisal.

Some final good reasons for an appraisal are that it also helps and gives confidence to the buyer about the business and any advisers the buyer chooses to use. The buyer is always the most nervous party in the transaction as they have the most to lose personally, financially and professionally. The greater their confidence the more likely they are to continue with their inquiry. Sellers forget that buyers have many options including just saying no and not buying a business. If you are a business buyer and you find two businesses that are of interest to you and one has done a valuation and one hasn’t; which do you think would be more attractive to make further inquiries about? Same question but instead of being the buyer, put your feet in the shoes of a lender. A buyer brings you two businesses they want to buy and need a loan with one having a business valuation and one not, which business do you think the lender will spend more time considering for a loan?

A business valuation is an important aid to all parties in the transaction. A business valuation normally refers to the appraisal of a business as a going concern. If the business includes real estate, this would be appraised separately from the business. If the business is not currently profitable, it can still have value if that value is couched in the assets of the business such as fixtures, furniture and equipment and /or inventory. To appraise these assets a Machinery and Equipment Appraisal would be used; not a business appraisal.

An appraisal is a great asset to a business transaction. There is cost and time required to put the proper document together but this should far outweigh not getting this done.