Getting a certified business valuation is something many owners never do, or even consider doing. It often takes a trigger of some sort for owners to realize they need to have their business valued at all.
If you do find yourself needing to know the value of your business, there is one question you must answer first: Does the business valuation report need to be certified?
Getting a definitive answer to this question before moving ahead will save you both time and money – and also ensure that the results of the valuation report serve their intended purpose.
In this article, we’ll take a look at the difference between a certified business valuation and an uncertified report. We’ll highlight instances when you will absolutely need an accredited appraisal, as well as what credentials to look for when hiring valuation experts. We’ll also offer some thoughts on why it’s always good to have your business valued periodically, whether the report is certified or not.
3 Differences Between Uncertified and Certified Business Valuations
There are three primary differences between a certified valuation report and an uncertified appraisal. They are 1) who performs the analysis, 2) what is contained in the report, and 3) how much it costs.
#1 Valuation Analysts: Certified vs. Uncertified
In order for a business valuation to be certified, it must be performed by an accredited valuation specialist. There are three primary organizations that educate and credential valuation professionals:
- National Association of Certified Valuation Analysts (NACVA)
- American Society of Appraisers (ASA)
- American Institute of Certified Public Accountants (AICPA)
The respective valuation certification conferred by each organization is:
- Certified Valuation Analyst (CVA)
- Accredited Senior Appraiser (ASA)
- Accredited in Business Valuation (ABV)
[The Institute of Business Appraisers (IBA) was acquired by NACVA in 2008. The IBAs certifications were Certified Business Appraiser (CBA) and Master Certified Business Appraiser (MCBA). If you see these credentials, they are outdated.]
It’s tempting to think that anyone trained in finance or accounting is qualified in small business valuation. Many owners assume their long-time CPA will automatically know how to value their business. To a lesser extent, some owners think that financial planners have the requisite knowledge to understand what a business asset is worth.
The fact is that most CPAs do not value businesses as part of their practice — they are more focused on tax, audit, and review. Likewise, very few retirement planners and financial analysts know how to value a small business. With that said, there are CPA firms that offer business valuations: Look for the acronym BVFLS (business valuation, forensic, and litigation services). Just don’t assume all CPAs do valuation work.
Lastly, there are many M&A experts who are trained in business valuation, as it is a critical component of any business sale or owner exit. While they are well-versed in how to value a business, not all M&A advisors and business brokers choose to hold one of the valuation credentials listed above. If you need a certified report, make sure any professional you work with has one of the credentials listed above.
[Note: If you need an uncertified business valuation for internal planning purposes — like deciding whether or when to sell your business — we recommend working with a business broker or M&A advisor. They can give you a valuation based on real-world experience selling businesses, and also discuss other aspects of the business sale process.]
#2 What’s Included in an Uncertified vs. Certified Report
A certified business valuation is required to adhere to professional standards and methodologies set forth by the boards of accreditation. A certified appraisal must also include specific information, whether the end-user wants it or not.
Some examples of information included in a certified report that you typically won’t find in an uncertified report include a comprehensive industry overview, compensation analysis, and both micro- and macro-economic statistics and data.
A certified business valuation must also use all three approaches to value: Market, Income, and Asset. It can be instructive to look at the value of a business based on all three approaches, but it’s not always necessary. For example, small business buyers are typically focused on intangible assets. As such, they favor the market approach using valuation methodologies based on earnings. In a case like this, using all three approaches may be unwarranted.
Another difference is that the result of a certified valuation will be a single valuation number (e.g., $5,682,000) whereas an uncertified report will typically express the value of the business as an expected range (e.g., $5.50M–$5.75M).
Not surprisingly, a certified business valuation ends up being a rather large document. Never mind that nine times out of 10 the end-user of the report will gloss over all but one or two pages — namely, the ones that contain the valuation number and a summary of how the analyst arrived at their conclusion.
Still, a certified business valuation is meant to be a very thorough analysis that covers all possible bases. In some cases the report is overkill, but there are also scenarios where the valuation report needs to be as airtight as possible (more on that below).
This brings us to the third big difference between an uncertified and certified business valuation: price.
#3 The Cost of the Business Valuation
When it comes to business valuations, you really do get what you pay for. Certified business valuations come with the highest price tag. And rightly so. There is an enormous amount of time and expertise required to perform one, and multiple parties often have a large stake in the outcome.
Following is an overview of the price points associated with both uncertified and certified business valuation reports.
Free Business Valuations ($0)
Some business brokerage and financial services firms offer a free valuation report. For these providers, a free valuation is often a lead-generation tool or method for upselling additional services like insurance products.
There’s some logic in the notion that a business valuation of any kind is better than none at all. But the task of putting a value on what is likely your most valuable asset deserves a proper amount of care and effort.
We don’t recommend taking advantage of a free business valuation, as they are often a sales gimmick with some kind of catch involved.
Cheap Business Valuations ($500–$2,000)
Business brokerage firms and other advisors sometimes offer a cheap business valuation service. These are often quick, back-of-the-envelope estimates. A common example would be adjusting your business earnings for the last one to three years, then applying an average business valuation multiple. Average multipliers can easily be found using either a national average or rules of thumb for a particular industry.
Again, you get what you pay for. A quick-and-dirty calculation may get you close, but the devil is in the details when it comes to valuation. Not diving deep enough into the financials or failing to ask the right questions can give a misleading result.
[NOTE: A word of caution about online valuation calculators. There are a few web-based solutions that let you input information about your business and get an instant valuation. You’ll find these valuation calculators in both the free and cheap price range.
We tested the leading business valuation calculator using real-world data. Our results showed a 50/50 chance that the value calculation is either a) in the ballpark of a reasonable value expectation, or b) totally bonkers. We do not recommend that you use an online business valuation calculator if you truly need to know — and potentially justify — what your business is worth.]
Affordable Business Valuations ($2,500–$5,000)
Many business brokers and M&A advisors offer excellent, in-house valuation services. These valuation reports look exclusively at what an external buyer would pay for the business, but the results can often be used for a number of reasons (see table below).
A good valuation from an M&A professional can often rival a certified report in terms of its accuracy and usefulness. In fact, some certified valuation providers will freely admit that if you want your business valued for a third-party sale scenario, a competent business-for-sale professional is the best person to ask.
Regardless, no uncertified business valuation — regardless of how good — should be used in place of a certified appraisal when one is needed.
Certified Business Valuations ($5,000–$25,000+)
If you need a certified business valuation, be prepared to pay at least $5,000. In addition to the price, you may also want to ask how long it will take for the valuation to be completed. Going through a proper certified valuation process can easily take four weeks, so be sure to ask.
There are many reasons why a certified business valuation may cost in excess of $5,000. These can include the size and complexity of the business, the need to value multiple business entities or partnerships, when industry experts are required, or when the valuation analyst needs to specialize in a niche, like intellectual property.
While the cost of a certified business valuation may seem high, the cost of not having one can be enormous.
When You Do/Do Not Need a Certified Business Valuation
There are a number of professionals who may tell you that you need to have your business valued. If someone has advised you to do this, ask them if the valuation needs to be certified, or if an uncertified report is sufficient.
Advisors who may ask you to get a business valuation include:
- Business Broker
- Financial Planner
- Management Consultant
- Mergers and Acquisitions (M&A) Advisor
Here are some common reasons for getting a business valuation, and whether or not the valuation report should be certified:
|Uncertified Business Valuation||Certified Business Valuation|
|Deciding whether or not to sell||M&A, sale, divestiture negotiations|
|Cash flow management||Internal & shareholder buyouts|
|Management decisions||Gift tax & estate tax planning|
|Setting an asking price||Employee benefits plans|
|Succession planning||Buy-Sell agreements|
|Retirement planning||Litigation of any kind|
|Strategic planning||Share redemptions|
|Increasing value||Raising capital|
There’s never a bad reason to get a certified business valuation. But there are plenty of instances when an uncertified report will do the trick. Here is a quick rule of thumb on how to know the difference: If the report is going to be scrutinized by the IRS, a lender, a regulatory body, a judge, or an attorney, make sure it is certified!
Don’t Wait to Have Your Business Valued
If there’s a worst-case scenario in business valuation, it’s going through all the time and effort — and paying a bunch of money — only to end up with a report that is either incorrect, unusable, or both.
There are almost 30 different ways to value a business. The key to getting the best valuation result is understanding who needs to know the value of your business, and why. This will help you determine what type of business valuation professionals to seek out and hire as well.
However, you don’t need a reason to get your business valued. Most business owners have the bulk of their net worth tied to the value of their business. Knowing how buyers value your business, then managing your business to protect and grow its value is just good sense. We recommend having your business valued at least every two years.
Do you know what your most valuable asset is worth? The advisors at Allan Taylor & Co. have been valuing small businesses since 2008. We have the skills and real-world experience to value your business if you’re ready to sell, or contemplating a future sale. We can also help with certified business valuations.
Reach out to us today! Our initial consultation is always no fee, no pressure.
Barbara Taylor is the co-founder of Allan Taylor & Co. You can follow her on LinkedIn and Twitter.