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Q:  I have been presented an opportunity to buy into a small business whose stock is owned by three individuals, one of whom is agreeable to sell.  Should I retain an appraiser to value the business interest?

A:  Yes.  In determining the value of closely-held corporation stock, the corporation's net worth, earning power and dividend-paying capacity are taken into account. Moreover, after these factors are taken into account, the value of stock may be discounted for a number of reasons, such as lack of marketability or lack of control.  Before making an offer, it would be wise to consult an independent valuation specialist with education, training and experience in these matters.  

Independent Appraisal
Business valuation professionals provide independent unbiased opinions of value for businesses and business interests of all sizes, for many different purposes.  Hiring a qualified appraiser can help you assess the validity of your own determination of investment value, and help you structure an offer and convince the seller of a negotiating price range. You may also need an independent appraisal to obtain financing or to provide documentation to support any valuation.

A Fair Value
In general, business appraisal fees are similar to other professionals in the legal and accounting fields. Appraisers usually quote their fees either as an hourly rate, which can vary depending upon the level of expertise of those working on the assignment, or as a flat fee for the appraisal report.

Appraiser Accredited
Caution is appropriate in reviewing an expert's qualifications.  The appraiser should provide their references, experience, and credentials. In that regard, you need to determine whether the appraiser has been certified or accredited by the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), the National Association of Certified Valuation Analysts (NACVA), or the American Institute of Certified Public Accountants (AICPA).

Standards Compliant
You should also ask whether your appraiser is familiar with the widely recognized professional standards for appraisers. The Uniform Standards of Professional Appraisal Practice (USPAP) and the Principles of Appraisal Practice and Code of Ethics (PAPCE) establish authoritative principles and a code of professional ethics for appraisers. In addition, the Business Valuation Standards (BVS) of the American Society of Appraisers supplement and clarify the USPAP and the PAPCE with respect to the valuation of businesses, business ownership interests, and securities.

Practical Experience
You should also select an appraiser who has practical experience in advising on buying or selling businesses. Moreover, it would be a good idea to inquire whether the appraiser has experience testifying as an expert witness to establish valuation in court.   The fact that an appraiser has provided expert testimony can add to the appraiser's credibility should you someday need his testimony to establish valuation.

Consult a CPA
For each of the foregoing reasons, it is essential that you select an appraiser whose qualification, experience and analysis are beyond reproach.  Remember that your local CPA can help.  He or she can answer any additional questions about your stock purchase and assist you in finding and working with a qualified appraiser. You may contact me at (409) 892-0233 or (409) 883-5306.  My email address is brad@ekc-cpa.com  


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