Privately-held Maine business owners might need appraisals of their interests for many reasons, including:
- Small business loans,
- Strategic planning,
- Mergers, acquisitions and shareholder buy-ins (or buy-outs),
- Equitable distributions of marital estates,
- Minority shareholder disputes,
- Bankruptcy, and
- Gifts and estate planning.
A business valuation is just a formality, isn’t it? Many Maine-based business owners only perceive formal appraisals for their businesses as something that is required by outside parties, such as the IRS, lenders, or a judge, in order to comply or obtain approval for a regulatory requirement. While it may be tempting for many small businesses in Maine to seek the offer with the lowest price tag, it’s important to realize that a valuation actually provides insight into a company’s current market value, as well as ways to enhance value moving forward. It is important to note that for business owners that might have unrealistic expectations, a valuation can also serve as a wake-up call.
Varying Degrees of Expertise
Do your research before hiring an expert for your Maine business valuation. Many people provide business valuation services, but their qualifications vary significantly. At one end of the spectrum is a valuation professional who has achieved the training, experience and continuing education requirements of one of the following business valuation organizations:
- Maine Society of Certified Public Accountants (MECPA)
- The American Institute of Certified Public Accountants (AICPA),;
- The American Society of Appraisers (ASA),;
- The Canadian Institute of Chartered Business Valuators (CICVA);
- The National Association of Certified Valuation Analysts (NACVA); and
- The Institute of Business Appraisers (IBA).
On the other end of the spectrum are online business valuation calculators and fill-in-the-blank software, which are typically based on oversimplified formulas or industry rules of thumb. Computerized models aren’t a substitute for an appraiser’s professional judgment and training. In short, you get what you pay for.
Appraisals Guide Major Decisions
In the words of NASA astronaut Alan Sheppard, “I wasn’t scared, but I was up there looking around, and suddenly I realized I was sitting on top of a rocket built by the lowest bidder.” Sheppard got lucky and returned from the moon to tell his tale. But are you willing to bank on the work of an amateur appraiser or computer model? In the long-run, the cheapest offer may actually cost more because steps may be skipped and unrecorded asset and liabilities may be overlooked. Lack of real-world evidence would fail to support conclusions.
If your appraisal is inaccurate, you could lose money or be sued or audited by stakeholders. For most Maine entrepreneurs, their business interests are their most valuable asset. Many important decisions — such as selling the business, obtaining a loan or splitting up a martial asset — hinge on business appraisals.
For example, if the IRS challenges a valuation prepared for gift and estate taxes, you’re more likely to withstand scrutiny with a qualified appraiser. The IRS defines a qualified appraiser as:
An individual who has earned an appraisal designation from a professional appraiser organization, or has met minimum education and experience requirements in the subject matter in which he or she issues appraisals. A qualified appraiser performs appraisals on a regular basis, and receives compensation for his or her work. The professional must not be prohibited from practicing before the IRS.
A qualified appraiser in Maine is someone who’s dedicated significant time and attention to mastering the business valuation discipline.
Know What You’re Buying
You might be thinking, “No one outside the company will ever see this appraisal. Why do I need to use a qualified appraiser?” While valuations prepared for litigation or tax purposes run the risk of outside scrutiny, reliable valuation conclusions are equally important for internal planning purposes. Inaccurate valuations can lead to poor investment decisions.
But hiring a valuator isn’t always straightforward. How do you know whether a valuation “professional” is the real deal? When evaluating business valuation candidates, price is one indicator of quality, but professional credentials are far more relevant. Investigate the business valuation organizations to which prospective valuators belong. Each organization has its own training, experience, ethics and standards, and continuing education requirements.
Also inquire about your Maine valuator’s standard operating procedures, data requests and expected timeline. Comprehensive valuations take weeks (or months) to complete. It takes time to learn how the company operates, conduct site visits, interview management, analyze the data and write a full report.
Likewise, take your time when selecting a valuation expert. Never jump at the first valuation provider you encounter online. Discuss the decision with your trusted financial and legal advisers first. Filler & Associates can help walk you through the valuation process.