Appraisers are agents who establish the value of businesses, personal property, intellectual property (such as patents, trademarks, and copyrights), and real estate through a process known as valuation or appraisal. The demand for valuation of business enterprises has increased in the last several years in many industry sectors for a variety of reasons, including the rise in corporate restructuring, rising incidences of litigation (such as divorce, in which value and possession of closely held businesses may be hotly contested), changing employee-compensation packages, continued purchases of existing businesses, and the proliferation of employee stock ownership plans (ESOPs), which require annual appraisals of value. Indeed, the dramatic surge in popularity of ESOP plans accounts for a significant portion of the increase in appraisal/valuation activity across the American business landscape.
PROBLEMS IN THE BUSINESS APPRAISAL INDUSTRY Many business owners and valuation experts contend that the business appraisal industry struggled with a number of significant problems in the late 1990s. These difficulties inevitably had an impact on small and large businesses that solicit the services of its membership. Geoffrey Richards, writing in National Real Estate Investor, offered a bleak—and somewhat representative—assessment of the situation: "Low certification standards have allowed a glut of inexperienced appraisers into the field, knocking the bottom out of the fee structure [for the industry] and leaving clients questioning the opinions they are buying. Changes made by federal regulatory agencies to improve the quality of work in the appraisal industry may have had the opposite affect, by flooding the industry with appraisers and reducing the amount of work available for them."
Analysts further observed that while the "glut" in appraisers was first felt in the single-family housing real estate market, it triggered an inevitable spill into the commercial market. As a result, observers have reported instances in which inexperienced or otherwise less-than-ideal appraisers have pushed out qualified appraisers who become frustrated with dropping fee rates and rising operating costs.
FINDING A QUALIFIED APPRAISER But while the business appraisal industry is a troubled one in some respects, consultants hasten to add that many qualified appraisers do exist, and that they can be of valuable service to small business owners who take the trouble to investigate the merits of various appraisers. Keys to finding a good appraiser include the following:
* Network—As one tax and estate-planning attorney told Inc., "Ask around, and then ask around some more. Talk to people in your geographical area, even if their businesses aren't just like yours; talk to people with similar businesses, even if they're not in your geographical area. Appraisal is a fraternity, and once you know who's in the fraternity, who's respected, you'll know who to go to. And, very importantly, if the reason you're looking for a valuation has anything to do with taxes, or is likely to somewhere down the line, find out who's respected by the Internal Revenue Service—who do they use to do their valuation work?"
* Look for experience and education—Appraisers with significant experience and a good educational background (MBA or CPA) are far preferable to those who are limited in either area. Moreover, some analysts believe that the appraisal industry is moving towards increased specialization (office buildings, hotels, professional practices, retail outlets, etc.); if possible, find an appraiser who is familiar with your business area.
* Recognize that valuations vary from client to client. Appraisals of business can vary significantly in terms of their cost, both in terms of time and money. Learn about standard fees imposed on business that most resemble yours in terms of size, health, and situation. "The vicissitudes of most projects—the standard ESOP valuation being an exception—often make it impossible to charge on a flat-fee basis, or even give a responsible estimate of hourlies," warned Nell Margolis in Inc.
* Find a licensed appraiser—The relative ease with which people are able to secure certification in the appraisal business has drawn fire, but it does establish a ground floor of presumed competence.