It can be very daunting for a small business owner, or a would-be small business owner, to consider buying or selling a small business.  One issue that can be particularly overwhelming is trying to determine the value of the small business.  An appraisal of the business is often the resource that will be looked to by both buyer and seller, to at least establish a starting point for determining the value of a small business.

In retaining a business appraiser, the small business owner will need to decide what kind of appraisal to order, a calculation engagement or a valuation engagement.  A calculation engagement is a less involved business valuation.  While a calculation engagement will use one or more methodologies to estimate the value of the business, the valuator may express no formal opinion or conclusion of business value as the estimate may not be the product of all of the steps that the valuator believes should be undertaken to provide the most accurate or reliable estimate of value.  A valuation engagement, on the other hand, is a well-developed business valuation that should represent the valuator’s most accurate or reliable estimate of value.  In lieu of speaking of calculation or valuation engagements, valuators sometimes also speak in terms of oral reports (least formal and developed), summary letter reports, or full narrative reports (most formal and developed).  Valuation engagements or full narrative reports are often requested when the report is to be relied on by third parties, such as the IRS or a lender.

In considering what type of appraisal to order, it can be worth taking the time to determine what type of report key third parties, such as a lender, may require.  Not surprisingly, a valuation engagement or full narrative report will typically costs thousands of dollars more than a calculation engagement, even for a relatively small business interest.  Sometimes business owners can begin with a less expensive, less formal, calculation engagement, and subsequently upgrade to a valuation engagement if needed.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]