How Much Does a Business Appraisal Cost?
The quick answer is that one can pay as little or as much as one wants for a business appraisal. The catch is in the nature of the analysis obtained.
There are websites out there that promise an evaluation (note the addition of the "e"? Ask me why if you are curious.) for free. Simply enter some figures and the page will provide your answer. There are some appraisal service providers who will charge tens of thousands of dollars, or more, for their analysis. Some appraisers rely on specific appraisal software in order to complete their assignments. I have met an appraiser who still used green bar paper and claims he is a purist. Personally, my software consists of Microsoft Excel and Word. I do not rely on a software coder to tell me what the value of your business is.
The overall cost to obtain a valuation of any business is dependent on several things, noted below:
1. How much overhead the appraiser has.
Large firms typically have large offices, multiple staff people, and access to all kinds of expensive data. Small firms typically do not have expensive offices, have very few, if any, staff people, and only pay for the data they actually use. Canyon Valuations is a small, one person office. I do all my own analyses.
2. How busy the appraiser currently is.
Some appraisers have other focuses, especially during certain times of the year. Many business appraisers are also practicing CPAs and they are much busier during early spring and late fall with tax preparation work. I am not a CPA and do not have a tax season. That does not mean that I am not busy, it just means that I have more flexibility about when I can schedule in assignments.
3. How fast you need the report done.
If you have procrastinated and waited until the last minute to have the business appraised, you may not be able to find anyone who is not already working on a project. If your timing requires an appraiser to work long hours into the night and miss valuable family time, you should expect to have to pay for those weekends. If you think you may need a business appraised, contact the appraiser early and find out what kind of lead times you should be expecting. Sometimes you might even get some valuable advice that affects the decisions you must make.
4. How much time your assignment will take.
Are your financial statements in good order? Are you current with all your tax returns? If so, than the analysis portion of the assignment will not take as long. If I have to first create a financial statement from bank records, before I can begin the valuation, that project will take longer. If there are no financial records at all, than the appraisal will take much less time, but will also be much less accurate. Do you need a full report written, or can your purpose be met with a much more summary report? (Also referred to as a calculation report). The amount of time it takes to obtain a report is directly dependent on how long it takes the client to send the requested data. On average, I ask for three weeks after receipt of the requested data, however each assignment is different. I once completed a calculation report in two days.
Canyon Valuations, LLC - Basic Fee Schedule
For businesses with at least five years of financial history, with solid financial statements, that have been showing steady operations over the period analyzed; I typically charge depending on the type of report and how large the subject Company is, between $1,500 and $7,500. I have had assignments where I charged outside that range. If you would like a more specific number, I would be happy to provide you a quote. Give me a call and we can discuss it. I quote fixed fees for most assignments because that way there are no surprises down the road. If you are looking for something more flexible than an appraisal report, that is also possible, but I typically charge hourly for those types of assignments.
The fee I quote is cited in the engagement agreement that all my clients sign, because it outlines exactly what I am doing, and what their obligations are. I also have a document request list that explains what documents I need to see.
The process I go through, and the analysis you are paying for, goes as follows:
1. I spread your financial statements on my Microsoft Excel spreadsheet so I can compare your business' operations to itself over time and so I can compare those operations to the industry average as well. The idea behind this analysis is to decide how much risk to assign to the operation. Value = income / risk I have to know both what income the business generates and how risky that income is.
2. I look for normalizing adjustments. Small businesses are operated with one thing in mind - Minimize Income Taxes! This means I need to investigate where and how the Company is able to accomplish this overarching strategy. The Company may pay rent to a related entity that actually owns the real estate housing the business. The Company may pay family members a salary for NOT working in the business. I have also found one business whose entire Advertising budget consisted of the expenses related to owning and operating his personal race car.
3. I consider what the future operations will look like. If the business has a solid history of stable growth behind it, that makes it very likely that the future will be similar. If the business does not have any history, or if it is very volatile, than that requires additional time and analysis in order to determine a likely future. The value of an operating business is based on it's expected future earnings. No buyer will pay for a business based on what it used to earn. Buyers invest in a business based on the returns they expect to be able to generate out of it going forward. Be very careful of appraisers who refuse to rely on any forecast except for a weighting of historical data. Is the business going to continue to operate exactly as it has in the past? Are revenues expected to decline for any particular reason?
4. I consider all the data and apply basic math skills in the application of various appraisal methods. The actual process of calculating value is very simple. Value = Income / Risk is a very simple formula. The key to a good appraisal report is determining what the actual Income is and using an appropriate Risk rate to measure it.
5. After all the methods have been calculated, I look at the underlying data for each and decide which methods provided a more accurate indication of value. Some businesses do not lend themselves well to the use of the market approach, therefore those methods should be given less weight. Some businesses only have value as it relates to the equipment owned. In those cases the income based methods are of little benefit and the asset approach should be relied on more heavily.
6. I am always available to answer questions regarding my analysis. You can ask me how I arrived at my number and why I made any assumption described in my report. In fact, if you have any questions about my process, you can ask those questions at any time as well. My contact data is below:
The quick answer is that one can pay as little or as much as one wants for a business appraisal. The catch is in the nature of the analysis obtained.
There are websites out there that promise an evaluation (note the addition of the "e"? Ask me why if you are curious.) for free. Simply enter some figures and the page will provide your answer. There are some appraisal service providers who will charge tens of thousands of dollars, or more, for their analysis. Some appraisers rely on specific appraisal software in order to complete their assignments. I have met an appraiser who still used green bar paper and claims he is a purist. Personally, my software consists of Microsoft Excel and Word. I do not rely on a software coder to tell me what the value of your business is.
The overall cost to obtain a valuation of any business is dependent on several things, noted below:
1. How much overhead the appraiser has.
Large firms typically have large offices, multiple staff people, and access to all kinds of expensive data. Small firms typically do not have expensive offices, have very few, if any, staff people, and only pay for the data they actually use. Canyon Valuations is a small, one person office. I do all my own analyses.
2. How busy the appraiser currently is.
Some appraisers have other focuses, especially during certain times of the year. Many business appraisers are also practicing CPAs and they are much busier during early spring and late fall with tax preparation work. I am not a CPA and do not have a tax season. That does not mean that I am not busy, it just means that I have more flexibility about when I can schedule in assignments.
3. How fast you need the report done.
If you have procrastinated and waited until the last minute to have the business appraised, you may not be able to find anyone who is not already working on a project. If your timing requires an appraiser to work long hours into the night and miss valuable family time, you should expect to have to pay for those weekends. If you think you may need a business appraised, contact the appraiser early and find out what kind of lead times you should be expecting. Sometimes you might even get some valuable advice that affects the decisions you must make.
4. How much time your assignment will take.
Are your financial statements in good order? Are you current with all your tax returns? If so, than the analysis portion of the assignment will not take as long. If I have to first create a financial statement from bank records, before I can begin the valuation, that project will take longer. If there are no financial records at all, than the appraisal will take much less time, but will also be much less accurate. Do you need a full report written, or can your purpose be met with a much more summary report? (Also referred to as a calculation report). The amount of time it takes to obtain a report is directly dependent on how long it takes the client to send the requested data. On average, I ask for three weeks after receipt of the requested data, however each assignment is different. I once completed a calculation report in two days.
Canyon Valuations, LLC - Basic Fee Schedule
For businesses with at least five years of financial history, with solid financial statements, that have been showing steady operations over the period analyzed; I typically charge depending on the type of report and how large the subject Company is, between $1,500 and $7,500. I have had assignments where I charged outside that range. If you would like a more specific number, I would be happy to provide you a quote. Give me a call and we can discuss it. I quote fixed fees for most assignments because that way there are no surprises down the road. If you are looking for something more flexible than an appraisal report, that is also possible, but I typically charge hourly for those types of assignments.
The fee I quote is cited in the engagement agreement that all my clients sign, because it outlines exactly what I am doing, and what their obligations are. I also have a document request list that explains what documents I need to see.
The process I go through, and the analysis you are paying for, goes as follows:
1. I spread your financial statements on my Microsoft Excel spreadsheet so I can compare your business' operations to itself over time and so I can compare those operations to the industry average as well. The idea behind this analysis is to decide how much risk to assign to the operation. Value = income / risk I have to know both what income the business generates and how risky that income is.
2. I look for normalizing adjustments. Small businesses are operated with one thing in mind - Minimize Income Taxes! This means I need to investigate where and how the Company is able to accomplish this overarching strategy. The Company may pay rent to a related entity that actually owns the real estate housing the business. The Company may pay family members a salary for NOT working in the business. I have also found one business whose entire Advertising budget consisted of the expenses related to owning and operating his personal race car.
3. I consider what the future operations will look like. If the business has a solid history of stable growth behind it, that makes it very likely that the future will be similar. If the business does not have any history, or if it is very volatile, than that requires additional time and analysis in order to determine a likely future. The value of an operating business is based on it's expected future earnings. No buyer will pay for a business based on what it used to earn. Buyers invest in a business based on the returns they expect to be able to generate out of it going forward. Be very careful of appraisers who refuse to rely on any forecast except for a weighting of historical data. Is the business going to continue to operate exactly as it has in the past? Are revenues expected to decline for any particular reason?
4. I consider all the data and apply basic math skills in the application of various appraisal methods. The actual process of calculating value is very simple. Value = Income / Risk is a very simple formula. The key to a good appraisal report is determining what the actual Income is and using an appropriate Risk rate to measure it.
5. After all the methods have been calculated, I look at the underlying data for each and decide which methods provided a more accurate indication of value. Some businesses do not lend themselves well to the use of the market approach, therefore those methods should be given less weight. Some businesses only have value as it relates to the equipment owned. In those cases the income based methods are of little benefit and the asset approach should be relied on more heavily.
6. I am always available to answer questions regarding my analysis. You can ask me how I arrived at my number and why I made any assumption described in my report. In fact, if you have any questions about my process, you can ask those questions at any time as well. My contact data is below:
Phone: (208) 749-3116 - Email: [email protected]
Mailing Address: P.O. Box 5197 - Twin Falls, Idaho 83303