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  • Writer's pictureChris Burand

Agency Valuations

When you need an agency valued, check this list first:

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  1. What kind of valuation do you need? Different agency values exist, exactly like different property values exist. In insurance you have replacement cost, actual cash value, market value, stated value, and so on and so forth. With a business, you have Fair Market Value, Fair Value (for investment and likely a different value using the definition of Fair Value for divorces), and so on and so forth.

  2. What level of valuation do you need? With business valuations, different levels of quality exist. This is the point where many agencies are shortchanged because the decision makers do not know different levels of value exist or why using and choosing the correct level is so critical. The lowest level of valuations, which I often see practitioners perform, are not recognized by many accreditation firms and courts. Most business owners do not know this is an issue. A low-level valuation might be appropriate for a few situations, but a valuation of a higher level is typically required. For almost all government purposes a formal, or nearly formal, report is required. An agency owner who thinks they will save some money and the extra 50-100 report pages by using a cheaper, less qualified appraiser usually gets a less than formal report. Not knowing a formal report is required, the agency owner thinks all is fine until the government contends that the report fails to meet the required standards. In other words, the report must not only determine a reasonably correct number but must conform with certain standards. The failure to meet all criteria, not just one part, could cause a major problem that results in an expensive solution, i.e., paying attorneys a lot of money and then paying a fine.

  3. Additionally, specific formats are required for certain kinds of valuations. Requirements exist that the appraisal must arrive at a reasonable number but also conform to a specific format. Failure to achieve both may cause a business owner to lose their case.

  4. Furthermore, the appraiser may need to possess one of just a few specific accreditations or else the appraisal may be ignored. The higher accreditations are much more difficult to obtain than insurance licenses so there is real meaning behind many appraisers' accreditations. For example, when completing valuations for estates and ESOPs, specific requirements exist for the reports and the required accreditations that the appraiser must possess in order to perform the appraisal.

Understanding that an appraisal is not just an appraisal, that it is not just about a number, is critical to avoid being taken advantage of by a low-quality appraiser. The cost of defending yourself in these scenarios is far higher than getting the job done right the first time.


Also, unless you are a masochist, do not fall for the ruse where a business broker provides a cheap report for market purposes and then advises that the report can be used for other purposes too. I know agencies that have lost suits under this scenario. Valuation reports are specific tools designed for a specific purpose. These reports are not multi-purpose-tools.


Another example of being taken advantage of most often applies to small agencies where someone, often the agency's accountant, advises that the agency is too small and unsophisticated to need a full valuation report. No exclusion exists, especially for estates and other governmental purposes, stating that small and unsophisticated businesses have different appraisal standards. Even with buy/sell agreements, the size of the agency does not dictate the complexity of a partnership, especially one that turns ugly.


If you really only need an informal valuation do not pay full price for something like a "Letter" valuation (even if it is 25 pages) or what is sometimes known as a "Calculation of Value." I have seen many reports that do not meet the high quality appraisal standards for which the agency was charged and paid full price as if they were receiving a high quality appraisal. A Letter valuation or Calculation of Value can be completed with many fewer hours of work than a full valuation and therefore the price should be much, much less.


I hope this helps all readers understand that much more goes into a quality appraisal than one might expect. And because business owners do not know all the details, variables, and regulations, they are more vulnerable to being taken advantage of. Don't be taken advantage of.

 

NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.


None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

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