There are many purposes for which an owner of a small business may need an appraisal of his or her business. These might include estate, trust and tax planning, gifting a business interest, marital dissolution, sub chapter "S" elections, buy-sell agreements, the pursuit of venture capital or the acquisition or sale of the business.

In response to this need, numerous individuals stand ready and willing to provide an estimate of value for a fee, including business brokers, CPAs, CFPs, business consultants, real estate appraisers, bankers, lawyers, college professors and perhaps, your partner's brother-inlaw, who reportedly once lived next door to a business appraiser.

Only some of these individuals are capable of providing a reliable estimate of value, depending on the appraisal’s purpose and the size and complexity of the business. For example, experienced business brokers can be quite adept at preparing value estimates for their small "main street" clients, especially those who operate in a distinct industry. Therefore, it's reasonable to approach a business broker to assist in the development of an asking price or offer price if you're considering the sale or acquisition of a very small business. But can you rely on this same broker to provide an appraisal for estate tax planning? And what about larger companies with, say, more than $1 million in gross revenues? Probably not a good idea.

First, if a valuation is needed for tax purposes, the Internal Revenue Service expects the appraisal to be performed in accordance with the Uniform Standards of Professional Appraisal Practice and Revenue Ruling 59-60. Although there can be no guarantee that the IRS will not challenge a value estimate, you run a higher risk of finding yourself in tax court if your appraiser is not wellversed in these standards. IRS officials currently estimate about 50 percent of all valuations submitted in conjunction with estate or gift tax returns are reviewed and those not performed properly will be challenged.

Further, if the purpose of your appraisal involves a third party such as a minority interest holder or partner, a qualified, independent appraisal may allow the parties to avoid costly litigation. If litigation is imminent (often the case in divorce proceedings), you'll want a highly qualified professional to provide expert witness testimony in addition to the initial valuation.

Finally, if your business's annual gross revenues exceed $500,000, its growth trends, operations and capital structure probably preclude it from being reliably valued with typical methods used for small businesses. In fact, value estimates of large, complex businesses (derived solely from multiples or "rules of thumb") can easily be hundreds of thousands, or even millions of dollars in error. In short, a business owner must carefully consider the tradeoffs between cost, reliability of results, and the independence of the appraiser when selecting a professional to estimate the value of his or her business.

Individuals qualified to perform business appraisals usually attain a professional designation from a reputable institution in the business valuation industry that attests to the person's qualifications. There are four senior designations which are highly regarded in the business valuation industry. They include the CBA (Certified Business Appraiser, from the Institute of Business Appraisers), the ASA (Accredited Senior Appraiser for business valuation, from the American Society of Appraisers), the ABV (Accredited for Business Valuation, from the American Institute of Certified Public Accountants), and the CVA (Certified Valuation Analyst, from the National Association of Certified Valuation Analysts). A professional who holds any one of these designations has demonstrated his or her expertise in the field of business appraisal.

Numerous other designations exist as well, but none of the organizations providing them require the level of training, expertise and experience required by the institutions that confer these four. If you're in need of a valuation by an independent qualified appraiser, your best bet is an individual who has earned one of these designations.

Roger Birong is a Certified Business Appraiser, Certified Management
Consultant and president of Birong Associates, LLC. He can be reached
at (904) 246-9948 or via the firm's website at www.birongconsultants.com.