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Creating An Accurate Business Appraisal


Business Appraisal Common Sense Business ValuationsAppraising businesses accurately is not an easy task. There are many different methods that can be used along with variations for the purpose of the appraisal. None of these methods, by its self addresses the total value of a business.

One method might look at cash flow value, another at asset value and another at a capitalization rate. It is up to the appraiser to pick what he thinks is the appropriate method. Some appraisals may use five different approaches and gives each of the approaches used a percentage of the final value with no justification as to why one may be 75% and another 5%.

Purpose also changes, as an appraisal done for the sale of a business will be different than one done for a divorce or an IRS requirement. One of the methods often used for divorce purposes is the "Excess Earnings Method" which was developed in 1920 to estimate lost goodwill suffered by breweries and distilleries because of Prohibition. It was never intended to be used to appraise businesses. I believe it is used because the math involved is very confusing and the method can be easily manipulated to provide a wide range of business values.

There is great variance in the quality of business appraisals. It is easy to pick up an accounting book and find the different methods of doing an appraisal, picking out a formula and plugging in some numbers. This process doesn't give you an accurate appraisal. Most accountants know this and turn to an experienced Business Appraiser for an appraisal.

Also, be aware that there are appraisers that stuff the appraisal with irrelevant and highly technical information to exaggerate the complexity of the appraisal to charge a higher fee for their services. Some over inflate the appraisal to make an owner feel he has a high value business.

During my 23 years of running my own Business Brokerage business I used the data from the business sales we made to develop a method that gave me the accuracy I wanted. I came up with a blended method of appraisal consisting of cash flow, asset value and market analysis. This blended method evaluates all items that create value in a business. I never have to guess if I am using the correct method or find percentages to use for each component.

Bob KleinAbout The Author: Bob Klein is President and Owner of Business Appraisals, providing California business owners and business buyers business appraisal services on all types of businesses. Bob Klein can be reached direct at 949-254-4062 regarding business valuations and appraisals.


Categories: BizBen Blog Contributor, Business Valuation Issues, Buying A Business, Selling A Business


Comments Regarding This Blog Post

Contributor: Business Appraisals, Valuations Advisor

Tim, I appreciate your comments on my article. I do want to state that as a Business Appraiser I go much further to produce an accurate appraisal than most business brokers. Business brokers only look at sales of businesses but we as business appraisers have to look at appraisals for multiple purposes such as divorce, partner buy outs, minority shareholder buy outs, SBA requirements and of course IRS reports. As specialists, we are much more in tuned to business appraisal requirements giving us the ability to produce a more comprehensive and accurate appraisal.


While i have tremendous respect for the expertise of CPAs, when considering a resource to perform an evaluation of the market value of a business, the CPA is not a viable choice. They can readily determine the "book value" and apply pre-determined "multiples" and ratios; but, they really have no knowledge or familiarity with the dynamics of the actual marketplace.

Only an experienced business broker or business appraiser can look at all the factors that affect business value--from the perspectives of real buyers and real sellers. And only these professionals have the requisite "feel" for the market and understanding of the dynamics that motivate, sustain, and complete actual transactions.

So, when I hear "But, my accountant says it's worth X", I respond, "And, when was the last time your accountant sold a business?"


  Helpful Resources To Assist In Selling And Buying California Businesses
Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Joe Ranieri, Business Broker, Orange & LA County Areas

Having owned retail/restaurant businesses for over 20 years, my interest turned to listing and selling businesses rather than owning them. I specialize tend to specialize in Orange County high volume restaurants, fast food independents and chains, bars and liquor stores. Call 714-292-5448.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Matt Weiler, Business Broker: Gas Station Specialist

Business Broker Specializing in primarily gas stations. Geographic area of focus: San Francisco Bay Area to Sacramento and as far South as Monterey, California. To sell or buy a small or large gas station phone Matt (gas station business broker specialist) direct at 408-623-0920.

Mike Hurrell, Broker: Coin & Card Laundry Specialist Brokerage

Providencia Properties Inc in association with Golden State Laundry Systems is a full service Coin Laundry Real Estate Broker. At GSLS you will receive personalized attention from our professional staff of coin laundry experts. To sell or buy a Southern CA laundromat call Mike at 310-223-2240 X209.


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