Business Valuation Blog | Understanding Buying / Selling a Company

In the world of professional valuation, whether for equipment, real estate, or businesses, the question of refundable versus non-refundable appraisal fees may arise when speaking with clients and colleagues. While it may seem more consumer-friendly to offer a refund if the client cancels the appraisal after engagement, there are sound professional and practical reasons why appraisal fees should be non-refundable.

Appraisers begin expending time, effort, and professional judgment from the moment the lead is generated through the initial stages of engagement. Significant up-front work will occur, including scope of work quotes, engagement documentation, initial research, data requests, client communication, and preliminary analysis. A refundable structure doesn't reflect the reality that much of the value provided happens early in the process.

Appraisal work is often collaborative. The client needs to provide documents, fill out forms, and offer insights into their business and associated assets. A non-refundable fee signals that the client is serious about the process, leading to better communications and follow-through. It reduces instances where clients delay or abandon projects without regard for the appraiser's time.

Valuation professionals are often booked out with multiple engagements. Accepting a job means reserving time on the calendar, potentially turning away other opportunities. A non-refundable fee protects against lost income when a client backs out midstream after that time has already been allocated.

Like legal or consulting services, an appraisal is a professional opinion based on the appraiser's training, accreditation, and analysis. The fee is not just for delivering a report but also includes the application of expertise. Just as you would not expect a refund from an attorney after they've spent hours preparing your case, even if you settle early, the same logic applies to appraisal work. In dispute cases, especially, the knowledge that an independent valuation is ongoing may actually facilitate a settlement before the results have been delivered.

Appraisers must remain independent and objective. Offering refunds could create perceived or real pressure to align conclusions with client expectations to avoid dissatisfaction or chargebacks. A clear, non-refundable fee structure reinforces the arm's-length, professional nature of the engagement.

In summary, credentialed appraisers provide unbiased, researched opinions that often influence major financial and legal decisions. A non-refundable fee structure reflects both the value of that expertise and the commitment required by both parties to ensure a successful outcome. Make sure to set this expectation up front so there are no surprises and help create a mutually respectful working relationship from the start.

In business, cost-conscious decisions often make good sense. However, that is not the case when it comes to valuing your company. While it may be tempting to take the cheapest appraisal option, cutting corners in this area can lead to costly mistakes. A certified business valuation is more than just a quick back of the napkin calculation, it is a detailed, defensible report that can impact key financial and legal outcomes.

Business valuations are primarily used in critical situations such as partner buyouts, divorce settlements, estate planning, mergers, acquisitions, and litigation support. Opting for a cheap, unaccredited valuation will likely result in an analysis that is not well-researched and overly generic, leading to inaccuracies that can distort the company's true value. This can result in unfair settlements, poor financial planning, or deals that fall apart in high-stakes situations.

Certified business appraisers follow professional standards such as those set by the ASA, NACVA, and USPAP. These standards ensure thoroughness, consistency, and credibility. Discount valuation services may skip vital steps, use generic software tools, or be performed by individuals without these credentials, putting the reliability of the report in jeopardy.

No two businesses are exactly alike. Industry, market trends, customer concentration, and operational risks all play into a business's value. Low-cost valuations often use boilerplate models with little regard for your company's unique attributes. You end up with a valuation that does not consider many of the specific factors that will impact the value of your operation.

An appraisal that cannot stand up to scrutiny is virtually worthless. If your valuation is ever challenged for tax reasons (the IRS), sale purposes (potential buyers), or in court (judges, arbiters, and jurors), you will need an experienced professional appraiser who can explain and defend their findings. Low-budget services will not provide that kind of post-report support.

What looks like a good deal today can create headaches and expenses tomorrow. If a valuation needs to be redone due to its inaccuracy, you will end up paying twice. Worse yet, poor decisions made on the basis of a weak valuation can carry long-term financial consequences.

In summary, a quality business valuation is an investment, not just a line-item expense. It requires experience, research, and professional integrity. While it may cost more upfront, a thorough, defensible appraisal will provide peace of mind, strategic insight, and long-term value. When it comes to understanding what your business is truly worth, cheap is not the way to go.

Business appraisers typically value "for-profit" enterprises that are driven by revenue and bottom-line income. But what happens when the entity in question is a nonprofit organization, one with no shareholders, no dividends, and no motive to generate profit? Can a nonprofit be valued? The answer is yes, though the methodology and purpose behind such an appraisal are quite different.

There are several reasons a nonprofit organization may require a formal valuation, such as M&A transactions, internal strategic planning, donation or gift purposes, litigation or dissolution, and financial reporting.

Unlike for-profit companies, nonprofits do not generate income for distribution. As a result, traditional valuation methods may not apply in the conventional sense. Here are some thoughts on possible approaches:

1. An asset approach may be relevant and involves calculating the fair market value of the organization's tangible and intangible assets minus liabilities.
2. A "Cost to Create" method estimates how much it would cost to recreate the nonprofit from scratch. This includes the cost of acquiring similar assets, staffing, and establishing the same level of community reach or donor base.
3. A modified income approach may look at the excess of revenues over expenses and whether the organization has a sustainable surplus to support its mission.

Suppose there is any similar nonprofit company market data available. In that case, the appraiser may be able to compare it to similar entities in terms of donations received, operational scope, or programmatic output. The market approach may likely be limited or non-applicable, given the uniqueness of many nonprofits.

Valuing a nonprofit comes with unique complications, including:

1. Donor Restrictions: Some funds and assets may be restricted and not freely transferable.
2. Intangible Value: Community goodwill, volunteer labor, and mission-driven reputation can be difficult to quantify.
3. Mission Over Metrics: The value of a nonprofit's impact doesn't always align with financial indicators.

Valuing a nonprofit organization requires a thoughtful approach that goes beyond dollars and cents. It's about understanding the real-world value of services rendered, community impact, and the sustainability of the mission. Whether for strategic, legal, or financial reasons, a professional valuation of a nonprofit provides essential insight into the organization's true worth and future potential.

If you own a small business, knowing what your company is worth isn’t just about preparing for a sale or attracting investors. It is also a powerful tool for internal planning and strategic decision-making. Business valuation provides insights that go far beyond a price tag, helping leadership make informed choices about growth, resource allocation, succession, and performance tracking.

Many businesses overlook valuation as a strategic planning tool. Understanding the value of your company helps you clarify financial health, shedding light on your company’s assets, liabilities, revenue streams, and risks. It can also assist in setting measurable goals by establishing a benchmark value, which allows you to track the impact of strategic initiatives over time.

Other internal uses for an updated business valuation include support for budgeting and forecasting, evaluating existing investments and potential expansion, succession planning, and ownership changes.

Different valuation approaches may be used depending on the nature of your business and the information available. Credentialed, experienced business appraisers will consider the three approaches to value (Market, Income, and Net Asset) while relying on those that make the most sense for your specific company. For example, the income approach may be a better method if you’re looking at future profitability, risk, and growth potential, all core factors in long-term strategic planning.

Integrating an appraisal into your regular business cycle helps you identify value drivers and detractors, monitor financial trends, adjust strategies proactively, and increase organizational alignment with long-term goals.

Consider a formal appraisal update when you’re holding strategic planning sessions or considering major changes in management or ownership. In addition, during periods of significant growth or after downturns, during a merger, or while prepping for financing and debt restructuring.

Business valuation can be a strategic mirror for internal reflection. When engaging regularly with a seasoned professional appraiser enables smarter planning, sharper fiscal management, and more resilient growth strategies.

When most people think of business appraisers, they envision a formal valuation report delivered for a specific need, whether for purchase and sale, divorce settlement, litigation support, or estate planning. However, the role of a valuation professional doesn't have to end when the report is submitted. In fact, engaging your appraiser as a post-report consultant can provide ongoing value that helps you act strategically on the valuation findings.

A valuation report is more than a number; it's a diagnostic tool that contains insights into your company's financial health, risk profile, industry standing, and operational efficiency. Business owners and stakeholders often find that they need help interpreting those insights and translating them into actionable strategies. This is where the appraiser steps in as a consultant.

Suppose your transaction continues to develop after the appraisal report is delivered. In that case, additional insights pertinent to the valuation and its role in ultimately closing a deal can be had through post-report consulting. For example, the appraiser can assist during negotiations and provide clarity on valuation assumptions. This may include rebutting opposing appraisal estimates or explaining the rationale behind valuation multiples. By identifying value drivers and detractors in the report, appraisers can help management focus on improving key metrics to enhance future valuations.

If a valuation becomes the center of a legal dispute, the appraiser can serve as a neutral expert or advisor, supporting attorneys and their clients with context and clarity. Business appraisers may also assist in interpreting their valuation in the context of family transitions, gifting, or employee ownership plans.

A valuation is a snapshot in time. Business owners who treat it as the end of the process may miss out on the deeper benefits of working with a professional who already understands their company. Post-report consulting transforms the valuation from a static document into a dynamic tool for growth, governance, and decision-making.

Business appraisers are more than number crunchers; they are strategic advisors. When you bring them in after the valuation report is complete, you gain a partner who can help unlock, preserve, and grow the value of your business over time.

Historical financial performance plays a key role in appraising small businesses; however, not all years are created equal. Economic cycles, management changes, and external shocks can skew one year's numbers compared to others. That is where weighted average valuation comes in; a method that applies varying importance (or "weights") to different years to better reflect the company's true worth.

Weighting is a technique that assigns more importance to certain years over others when calculating average performance metrics, such as gross revenue, EBITDA, or net income. This is often necessary due to the possibility that recent performance is more relevant to current and future expectations. In addition, outlier years due to economic downturns or windfall profits may distort the average. This has become even more prevalent since COVID-19, as both 2020 and 2021 results for many companies may be skewed dramatically in different directions.

The weighting of prior years is somewhat subjective, and the appraiser should rely on their experience and expertise while making common-sense decisions as to how to apply this methodology.

One option is to equally weigh the prior 3+/- years of performance if the company shows a steady level of revenue and net income. This is fairly straightforward but can mask more recent trends and future growth forecasts in the company.

Incremental weighting may be more appropriate in certain instances with recent years given progressively more weight. This drives the emphasis of current performance without completely neglecting older operational periods.

In some cases, especially with newer businesses just getting a foothold, the appraiser may rely 100% on the most recent income and balance sheets as they represent the first full period of operation with everything running in full swing.

The volatility of the market or industry may play a part in this decision as well. If performance in a given industry is overly cyclical, relying on a broader period may smooth out the revenue swings. In contrast, companies showing steady growth year over year may determine a need to rely on more recent performance only.

In conclusion, the weighting of historic financials is an important component of business valuation and can provide a more balanced picture of a company's performance. Whether buying, selling, or just looking at internal strategic planning, speak with your certified valuation professional to discuss this in more detail when engaging in an updated appraisal.

In the world of valuation, clear and accurate communication is essential. Two concepts that often create confusion, especially among clients and newer appraisers, are extraordinary assumptions and hypothetical conditions. While they may sound similar, they serve very different purposes in an appraisal report and can significantly affect how a value opinion is interpreted.

An extraordinary assumption is something the appraiser presumes to be true for the sake of the analysis, even though it may not be certain at the time of the appraisal. It is typically considered more common in its use and implies that while the assumption could be true, it hasn't yet been verified.

One example would be where a business is valued at a future date using forecasted data, which includes the assumption that significant investments will be made over the course of that future period. This assumption would be considered "extraordinary" because if it turns out to be false, it could significantly affect the value conclusion.

A hypothetical condition, on the other hand, assumes something that is known to be false as of a current or retrospective date but is taken as true for the purpose of the analysis.

This type of condition is essentially a "what-if" scenario. It is used when the appraiser is tasked with analyzing a situation that doesn't reflect the present reality of the business, such as a hypothetical change to the balance sheet or income statement, to show how the company may be more profitable under a restructured condition.

Both extraordinary assumptions and hypothetical conditions are recognized under the Uniform Standards of Professional Appraisal Practice (USPAP) and must be clearly disclosed in the report.

Using them incorrectly can lead to misleading or non-credible appraisal results. More importantly, readers of the report, such as business owners, lenders, investors, or courts, need to understand whether the value opinion depends on something that is uncertain (extraordinary assumption) or flat-out not true (hypothetical condition).

Understanding the difference between these two concepts ensures the credibility, clarity, and compliance of an appraisal report. When used properly, extraordinary assumptions and hypothetical conditions allow appraisers to address real-world complexities with professional rigor.

As a business appraiser, your primary role is to provide accurate, supportable, unbiased valuations. But in today's competitive landscape, delivering high-quality work is not enough. To grow your practice and stay relevant, it is essential to build relationships with professionals whose clients regularly need valuation services, such as financial planners, accountants, attorneys, and business brokers.

The fact is that valuation work complements the role these third parties have with small business owners. They play a critical role in guiding their clients through significant business and financial decisions. At certain points, they will need a trusted valuation expert to support their work.

For example, financial advisors may require business valuations for succession planning, retirement strategies, or wealth transfer. Accountants often need independent valuation work for tax reporting, buy-sell agreements, or compliance-related matters. Attorneys rely on valuations in divorce proceedings, shareholder disputes, estate planning, and litigation support. Business brokers require accurate valuations to set listing prices and help both buyers and sellers negotiate fairly.

When these professionals require appraisal work for their clients, having a go-to expert like you adds value to their service and positions you as an indispensable partner. Working together with a mutual client builds credibility and trust. Over time, you will learn each other's working styles, communication preferences, and areas of expertise. Over time, by delivering accurate, well-documented valuations, they will be comfortable referring you to other business owners in the future.

Building these types of relationships will allow you to grow your valuation practice more efficiently by networking with a single contact for multiple engagements over time. Your client base says a lot about you. Being well-connected with respected professionals elevates your standing in the business community and valuation industry.

In summary, business valuation is a specialized field, but it doesn't operate in a vacuum. Proactively developing relationships with other small business consultants allows you to expand your reach while elevating the quality and value of your service. It's a win-win for everyone involved, especially the client.

When business partners decide to part ways, a fair and accurate valuation of the company is a critical step in the process. Whether a partner is retiring, moving on to another venture, or selling their stake for any other reason, determining the current value of your small business provides a high likelihood of a smooth transition while minimizing the chance for a dispute.

An independent, unbiased appraisal ensures that the partner leaving the company is compensated fairly based on their stake in the business. Without a professional third-party valuation, either the departing or remaining partners may end up at a financial disadvantage, leading to conflicts that could quickly turn into a legal battle.

When partners disagree on the value of the business, this dispute will delay or even derail the buyout process. An objective appraisal from an outside professional mitigates these risks by providing a transparent, supportable analysis along with a narrative report presentation that all parties can agree upon.

If the buyout requires financing, lenders and investors will often require an accurate business valuation before approving any funds. A certified valuation strengthens the case for securing loans or attracting new investors to support the transition.

Business buyouts have significant tax and legal implications. The appraisal will assist in providing compliance with these regulations and avoid legal issues that could arise from improper financial disclosures. The business’s financial health is also at stake should a buyout not go smoothly. By engaging with a qualified and experienced appraiser, the remaining partners can maintain stability and continue operations without financial strain or uncertainty.

A documented valuation will set a precedent for ongoing business activity while providing a reference point and reducing ambiguity for future transactions within the business.

In summary, if you or your partner are considering leaving the company, one of the first steps in the process should be obtaining an independent business valuation. Engaging with a credentialed appraiser will greatly assist with ensuring fairness, preventing disputes, and maintaining business continuity. Seeking professional valuation services can safeguard all parties involved and provide a clear path for a successful transition.

When a small business owner passes away, their estate will most likely include the company and its underlying assets. Accurately valuing this business is essential for a smooth estate settlement and ensure a fair process that will minimize potential disputes, while also complying with legal and tax obligations.

For estates with multiple heirs, determining the market value of a business ensures that assets are divided fairly. Without an independent valuation, disagreements may arise over how to split ownership or distribute the inherited assets in a balanced fashion.

Estate taxes can be a significant concern, creating a need for tax planning strategies that minimize beneficiaries' liabilities. A business valuation completed by a credentialed, experienced professional will help determine the taxable value of an estate and ensure compliance with IRS regulations.

Heirs may choose to sell or continue operating the business. An appraisal will provide a realistic picture of the company's worth, guiding informed decisions about buyouts, sales, or ownership transfers. It also prevents underpricing or overestimating the business's value, which could lead to financial losses.

A business valuation can help prevent or resolve conflicts among heirs, partners, or stakeholders. Without an objective assessment, disagreements may escalate, leading to costly legal battles that can drain estate resources and delay settlements.

For businesses with multiple owners, a valuation is crucial for executing buy-sell agreements and succession plans. Knowing the business's worth ensures a smooth transition and avoids operational disruption.

Courts, probate proceedings, and the IRS often require a formal business valuation as part of estate administration. A properly documented valuation supports legal compliance and helps avoid penalties or disputes with tax authorities.

In summary, engaging with an independent business appraiser to conduct a formal valuation is a fundamental step in estate settlement that affects heirs, partners, and the future of the business itself. The report will be of great assistance in ensuring accuracy, fairness, and compliance, ultimately easing the transition for all parties involved.