How Much Should I Spend on a Business Appraisal?
Pricing to value a company varies from free to $15,000 for most business owners. How do you decide what is the appropriate valuation type and cost for you? Business Appraisal Florida has designed this decision tree to help you get the most value for your time and investment and to understand business appraisal pricing.
Question #1: Is it for the Courts or the IRS?
Do you need a business valuation for IRS purposes? The IRS and courts have a certain minimum standard when it comes to valuing a company. These certified valuation reports are typically 60-100 pages long, valuing your business using at least 4-7 different valuation methods. And the certified valuation expert signing the valuation would be comfortable testifying in court presenting their finished product and all work notes created during the valuation engagement.
If the valuation is for litigation or a divorce, then you definitely need a certified business valuation report to the court’s standards. You will also need a personal goodwill allocation if your state allows for it under your state’s marital asset laws.
Valuation Cost $7,000-$15,000 plus court time (if needed)
Question #2: Is it for a bank to make a loan?
SBA lenders have minimum standards they ask for from approved valuation firms. These reports can be from 40-60 pages long and signed by a CVA or similarly credentialed valuation professional. The valuation firm has some liability if the loan goes bad and their valuation services are questioned.
Valuation Cost $3,000-$7,000
Question #3: Are you selling your business to a family member?
I buy a new Lexus for $100,000 and sell it to you for $1. I am a nice guy. You buy a Lexus for $100,000 and sell it to one of your Children for $1. The IRS wants to be paid on that $99,999 gift tax.
If the transaction is not at arms-length, then you will need a certified valuation and a goodwill allocation just in case the IRS investigates your family transaction after the fact. This also holds true if you are transferring your shares into a trust for the benefit of your family.
Valuation Cost $6,000-$15,000
Question #4: Are you selling the business to your employees?
If you are a large enough business, you can use an ESOP as a vehicle to sell to your employees. If you are less than $20,000,000 in sales, you can have your company valued, arrange pre-financing for your management team, and consummate the sale. Our sister company Bankers Advocate can help you with both a family transfer/sale or a sale to your key employees.
Valuation Cost $6,000-$15,000
Question #5: I am buying a business
The size of the target company and whether you are using SBA or bank financing will decide on the complexity of the business valuation report you need. Larger businesses with complicated financing and deal structure need a more robust valuation done with fraud and other due diligence. Here is a Due Diligence checklist our sister company Bankers Factoring uses.
Valuation Cost $3,500-$15,000
Question #6: I just want to know a ballpark value of my company every few years
You are a small business, or you do not plan to exit business ownership for a few years, and you just want to know the estimated market value of your business for retirement planning or a future sale.
You also may want to issue key employees’ phantom stock or have a buy-sell agreement that has not been triggered, but you still need to know the companies worth.
Valuation Cost $1,200-$4,500
Question #7: I received an unsolicited offer for my business.
If it is a serious offer from a serious buyer, you can have a medium-priced certified valuation done. However, be careful. You are only talking to one buyer so they are driving the transaction. Have them sign an NDA and show you proof they have the financing in place to close on buying your company. After they take those two steps, then you can invest in a middle price ranged certified valuation which will contain a market approach, similar business comparisons, and cash flow analysis.
Valuation Cost: $4,000-$6,700
Question #8: I have a great idea and I want to use the valuation to approach investors.
A hypothetical valuation is done so an angel investor or family member can see how you forecast your business to grow using their working capital investment. The investment can be in equity, financing, or a combination of both. We have an in-depth article on valuing pre-revenue start-ups.
Your forecasted growth and our research on similar companies on a similar growth projectory will drive the valuation process’s results.
Valuation Cost: $5,200-$9,000 (Hypothetical Valuation)
There are many other reasons to have your business valued, but this covers 99% of what we have seen in the last 20 years. So whether you need a business appraisal for IRS purposes, for selling your company, or other reasons, gather your financial statements and other valuation data and Business Appraisal Florida will be happy to have a zero commitment discussion about your situation and your appraisal cost.
And the free valuations? You get what you pay for, and they are good for cocktail conversations at best.