Fees Associated with Business Valuations
INNP Consulting > Insights > The Asset, Income, and Market Approaches to Value a Business
March 12, 2020
How Much Does a Professional Business Valuation Cost?
BY ANASTASIA BOURGEOIS
In general, there are two types of fees associated with a professional business valuation: a business appraiser’s compensation, and additional fees for using the work of one or more specialists.
1. Professional Business Appraiser’s compensation
Traditionally, the cost to perform a professional business valuation can range from $6,000 to $20,000. A valuation fee can be a flat fee or quoted on an hourly rate basis. The cost to perform a business valuation can vary significantly from one business being valued to another, and from one valuation company to another.
There are several factors that play a critical role in determining appropriate compensation for a professional business appraiser. They include:
Purpose of a valuation. The purpose of a business valuation is one of the biggest drivers of appraisal cost. For example, valuations meant to be used as informal or preliminary pricing benchmarks for buyers or sellers of family-owned businesses require less work from the valuation expert and may cost less. On the other hand, valuations meant to be used in large-scale, complex litigations usually require a lot more work from the appraiser and can cost more.
Type of a valuation engagement, e.g., calculation engagement, summary valuation engagement, detailed valuation engagement. A Calculation Engagement cost can vary anywhere from $3,000 to about $8,000. Calculation Engagements are less costly, more limited in scope, require less in-depth research, and do not require the application of all three business valuation approaches. A Valuation Engagement cost can vary anywhere from $6,000 for a Summary Valuation Report to $30,000+ for a Detailed Valuation Report. Valuation Engagements are more costly, broader in scope, require more in-depth research, and involve the “full” valuation process including consideration of all three main valuation approaches. To read more about The Types of Valuation Engagements click here. To read more about the Three Main Business Valuation Approaches click here.
Nature and complexity of a business interest being valued. When estimating the cost to perform a valuation, a business valuation expert considers a particular industry and category of business, associated regulatory requirements, a company’s structure (single entity vs. holding company; single unit or multiple subsidiaries or other multi-tiered entities), a company’s size (global vs. domestic enterprises), the structure of an interest being valued (common, preferred and treasury shares), a company’s capital structure (simple or complex with various classes of securities), effect of the imminent stockholder action, and other factors.
Professional valuation expert’s experience and areas of expertise. In order to obtain an objective and defensible valuation and avoid substantial valuation misstatements, it is important for a client to ensure he or she engages a valuation expert that possesses experience and training in the type of work appropriate for a given valuation, and the depth of understanding in the appropriate industry and category of business. Valuation expert’s credentials are especially crucial for valuations performed for such purposes as litigation support, estate and gift taxation, valuations of Employee Stock Ownership Plans (ESOP), and financial reporting.
The urgency of an engagement. A business valuation is typically completed within three to six weeks from the day the appraiser receives all requested information. Valuation fees may be higher for urgent engagements that require a quicker turn-around.
A valuation performed by an experienced and accredited business appraiser is not likely to be the least expensive, but such valuation is expected to avoid substantial understatement or overstatement of value, and will assist the intended users of the valuation to make the right business decisions or reach the best business outcomes.
2. Additional Fees for Using the Work of a Specialist
If needed, a client may incur fees for using the work of one or several specialists. Examples of the work of specialists include real estate and equipment appraisals performed by real estate and equipment appraisal companies, estimates of reasonable compensation from professional staffing companies, and Intellectual Property (IP) and patent valuations performed by IP attorneys.
National Association of Certified Valuators and Analyst, NACVA (2015). Professional Standards. Retrieved from: http://web.nacva.com/TL-Website/PDF/NACVA_Professional_Standards_Incl_Review_Stnds_Effective_8-1-15_Final.pdf
The asset-based approach is defined as a general way of determining the value of a business based on the value of its assets net of liabilities.
To read more about the Asset Based Approach and its underlying methods click here.
Using the market approach, business valuation professionals base the value of the company on how similar companies, both private and public, were priced in the market in the past.
To read more about the Market Approach and its underlying methods click here.