Many of the corporate entities
appraised either own or rent the
real estate where the business is
operated. For a successful operating
business, the most meaningful
valuation is typically based on some
measure of capitalized earnings,
rather than the value of the
underlying real estate. However, one
should recognize that some
businesses, due to the nature of
their operations, are characterized
more by their underlying assets, and
less so by their earning power. This
is true for asset holding entities,
and for some older family businesses
with marginal earnings but with
appreciated real estate on the
books. Many business appraisers are
not asset or real estate appraisers.
They may need to obtain and consider
a qualified real estate appraisal in
the business valuation process.
Each business appraisal is
unique, and experience counts. Most
business valuation firms are
generalists rather than industry
specialists, but the experience
gained in discussing operating
results and industry constraints
with a broad client base gives the
appraisal firm lots of ammunition to
understand your client’s special
situation. Credentials do not
guarantee performance, but they do
indicate a level of professionalism
for having achieved and maintained
them. Insist upon them.
Business valuation is an art as
well as a science and appraisers
will utilize and give different
weights to various valuation methods
as they suit the particular needs of
an assignment. Key methods typically
utilized include: transactions
method (focuses on actual
transactions in the security being
appraised); underlying net asset
value method (considers estimates of
fair market value of the entity’s
net assets, on a tax-adjusted
basis); capitalization of earnings
method (based on estimates of
underlying earnings power times a
derived capitalization rate);
guideline company method (similar to
using the capitalized earnings
method, but uses comparable, or
guideline companies to derive the
appropriate capitalization rate);
discounted cash flow (derives the
present value of future cash flows,
based on a combination of projected
future cash flow and a derived
discount rate appropriate to the
situation). Other valuation methods
may be appropriate to certain
companies in specific industries
where particular comparable
transaction data may be available.
