Business appraisal is nothing new, but what is new is a sharp upward swing in both the quantity and the quality of practitioners. Five years ago, it took some legwork to find an appraiser. Today, just let your fingers do the walking. The business valuation expert is here -- and there, and everywhere.
"Business valuation has made quantum leaps in the past few years," says Allan Lannom, director of operations at Lloyd-Thomas/Coats & Burchard, a 90-year-old general appraisal firm based in Calabasas Park, Calif. Patrick Hurley, in his seventh year at Howard & Co., a Philadelphia firm engaged in corporate financing, publication, and valuation, agrees. Hurley, mincing no words, says, "We've seen a lot more potential, and decided consciously to market directly instead of waiting for referrals. Now, instead of waiting for an attorney to call up and say, 'You do valuations, right?' I tell everyone I see, 'We do valuations."
A sign of the times, notes James H. Schilt, editor of the American Society of Appraisers' Business Valuation News, is the emphasis in the financial press on targeting business appraisal as a money-making venture. And membership in the business section of the ASA has grown more than 300% since 1980, making it the association's fastest-growing category of accrediation. Attendance at the section's increasingly ambitious and sophisticated annual educational seminars has multiplied just as dramatically.
Why the sudden ascendancy of a discipline that for years has been largely ignored? Since every private company with an employee stock ownership plan must have an annual valuation for tax purposes, the rise in popularity of ESOPs alone would account for quite a bit of the boom. "The banks are going crazy trying to put these things in," says Lannom. "The tax laws make ESOPs so desirable that anyone who doesn't have one looks like an oddball or a redneck." If the prospect of diminished tax advantages under President Reagan's proposed tax amendments has had any chilling effect, Lannom hasn't noticed. He gets as many client calls for ESOP-related valuations as ever. Business valuator Brian Napier, of Greensboro, N.C., gets more. "Some people don't think there's going to be any dramatic change," he says, "and some who do want to get in under the wire." Rising demand for valuation experts also has come from private companies choosing to include equity in their employee-compensation packages (see "In Search of Equity," INC., April 1985).
Voluntary transfers of equity, however, and not the only transactions that call for the appraiser's stamp. Divorce -- which more and more often features a closely held business as one of the most hotly contested properties -- requires his-and-hers stock valuations. And the Internal Revenue Service, long an inadvertent fee generator for lawyers and accountants, is now performing the same service for valuation experts. "About 75% of our business is tax-litigation related," says John E. Bakken, who heads up his own business valuation firm in Denver. The hefty proportion of litigation-bound clients explains why the agenda of the ASA's fourth annual business valuation seminar this past November featured a session on "The Business Appraiser as Expert Witness."
Finally, there's the trickle-down effect of the media's current love affair with entrepreneurship to be considered. Small-business owners are eager to explore the dimensions of their starring roles in the age of the entrepreneur. "A number of my clients don't have a transaction at hand when they bring us in," says Napier. "They want to know the value of their companies, for whatever might arise in the future. They know they've got something of value, and they want to know what that value is."
Whether or not they find out will have a lot to do with which of the current crop of valuation "experts" they end up picking. The appraiser's art -- recent gains in respectability notwithstanding -- remains, as Patrick Hurley puts it, "a judgment call based on knowledge of how a company really works." And uncovering that information is no easy task for even the best of appraisers. Detailed and sophisticated examination of the books is necessary, but hardly sufficient. The conscientious value expert will also have to assess a barrage of information ranging from personal, financial, and legal relations among founding/owning families to game plans of prospective successors to whatever local, national, and worldwide conditions exist affect the company.
"Anyone can call himself an appraiser," states Lexington, Mass., attorney Dennis O'Connor, who believes that the new-wave valuation professionals, whatever codes of ethics guide them, are usually little more than the eternal guessers and assessors."I think that the ASA is driving out the charlatans," counters Bakken -- but even he admits that the battle is far from over. Clearly, the business owner should be cautious when selecting an appraiser.
Unfortunately, that warning is about the only definitive statement that can be made on the issue. When it comes to appraising the appraiser, there are no rules and few guidelines. Fee comparisons, often a helpful selection standard, fall short in this instance. At Howard & Co., for instance, says managing partner Joel S. Lawson III, a simple valuation might cost under $2,000, while a "high-end" job -- "involving, say, a large, noncontrol block of stock in a closely held company, in the hands of the estate of a person whose name is the same as the company's, with many millions of dollars at stake and several groups of interested parties" -- can run as high as $40,000 to $50,000. The vicissitudes of most projects -- the standard ESOP valuation being an exception -- often make it impossible to charge on a flat-fee basis, or even to give a responsible estimate of hourlies.
"How much you ought to be paying depends entirely on the specific circumstances of the transaction in question," says Sherwin Simmons, senior tax and estate-planning lawyer with the Tampa law firm of Trenam, Simmons, Kemker, Scharf, Barkin, Frye & O'Neill. "A fee that looks outrageous could be reasonable; a modest-looking fee could be highway robbery." Time estimates? "Two weeks is probably suspect, even for a tiny business," says Simmons. "A month might be more like it -- but depending on the circumstances, one to three months wouldn't be all that unusual. In certain special circumstances, eight months to a year wouldn't be unduly long." Credentials? Maybe. The ASA's testing and practice requirements for certification do establish a quality floor. But assuring a business owner that he is hiring neither a neophyte nor a fool is far from saying he has bought the best service.
Experience? "I'd say that anyone who isn't a CPA or an MBA and hasn't been out on the street for 20 years or so is going to have a hard time telling what a company's really worth," says Bakken. Sherwin Simmons agrees: "No amount of formal education will make [an appraiser] worth a tinker if he hasn't had the experience, learning every day. To be really good, he's got to be battle-scarred." Essential, maybe, but no guarantee. Some of the charlatans have been at it for years.
Given ambiguous directions through uncharted territory, a business could use a simple word of advice. Sherwin Simmons has it: "Network," he says. "Ask around, and then ask around some more. Talk to people in your geographical area, even if their businesses aren't just like yours; talk to people with similar businesses, even if they're not in your geographical area. Appraisal is a fraternity, and once you know who's in the fraternity, who's respected, you'll know who to go to. And, very importantly, if the reason you're looking for a valuation has anything to do with taxes, or is likely to somewhere down the line, find out who's respected by the Internal Revenue Service -- who do they use to do their valuation work? You've got to remember at all times why you're doing this in the first place: sooner or later, there's a player on the other side, and if the other side doesn't buy your valuation, then you wasted your money."
The latter point would raise little debate these days at U.S. News & World Report. For the better part of the past two decades, the staid and respected publication has offered a series of benefit plans that ended up making stockholders of employees on their fifth anniversary of employment. The plans required that each participant, upon retirement or termination sell his shares back to the company at the current stated value. This, in turn, called for an annual valuation of the privately held company, whose stock was appraised by American Appraisal Associates Inc., a national valuation firm based in Milwaukee.
At of December 31, 1983, with the stock's value exceeding $35 million, the magazine was put up for sale. Some six months later, it had a new owner, Boston real estate magnate and The Atlantic magazine chairman Mortimer B. Zuckerman, and a new value -- Zuckerman's winning bid of $176 million. The "fair-market" value came as something of a shock to former employees who had cashed out at lower figures. Eager to cash back in, some 230 of them filed suit, alleging, among other things, collusion between the company and its appraiser, and asking for a chunk of the company's present value to be distributed among them. As of August 1985, numerous legal maneuvers and amendments later, the damages sought topped $90 million. Current equity-holding employees -- their overnight enrichment in danger of vanishing overnight -- are fighting back. Ten law firms, representing hundreds of plaintiffs and defendants, are now duking it out.
As for the company's true value, a respected appraisal firm has been heard from. So has an actual buyer. Chances are good, however, that the final answer is going to come from a federal judge.