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UPDATE 9/20. In the 2000s there were purchases by large commercial appraisal firms, as the industry consolidated. In March, 2020, that stopped to the dramatic decline in commercial appraisal lending by banks due to the pandemic. Previously, fees had been low for awhile for commercial lender appraisals.
FYI appraisal business valuations are typically done for divorce purposes. They can vary from $0 to hundreds of thousands of dollars for the same appraisal company. Business valuations can vary widely. Be sure to find someone who is experienced in valuing small professional service businesses. ASA designation is best.
Can you sell your appraisal business?
We all wonder if there is any value in our businesses. Can we sell it when we retire, move, or just get burned out? Yes, there have been sales of appraisal firms, from small one-person to large with over 20 appraisers.
Many appraisal company owners believe their business is too personalized to transfer. But almost all appraisal companies are personalized to some degree, including those that sell.
What makes a business marketable?
Factors making an appraisal company more attractive, and valuable, to a potential buyer are listed in the table below. Ratings are assigned to each factor.
Use these factors to see how your business ranks, and how you could improve it to make it more saleable.
If you’re in an area where you can easily start a business, and there’s nothing particularly unique about your business to make it more attractive to a buyer, selling your business will be more difficult. Your associates may not be interested, but an outsider probably will not be. On the other side, if you’re in an area where entry is very difficult (a “closed shop”) your business will be more marketable.
Location in a popular vacation area, like a Colorado ski town or Hawaii, will make your business more marketable as there will be many more potential buyers. Those areas tend to be closed shops, with difficult entry. For new appraisal companies, typically, the first few years are really rough, with low incomes.
Within urban areas, the particular city you’re in can make a difference. For a commercial appraisal company doing high-end properties with national clients, a San Francisco address could be very advantageous.
Location in a city with a large population and relatively few appraisers would often be more valuable than an adjacent city with a much lower population.
Size of revenues
If revenues are under $200,000, particularly if under $125,000, the buyer is “buying a job”. The alternative of working for a salary is a strong alternative to a buyer. Why pay $30,000 to $100,000 for a business if you can make $40,000 to $60,000 at a staff job?
Over $500,000, the larger up-front cash down payment and loan payments can be a problem. It may be more worthwhile for the buyer to spend the money on marketing a new business.
Pre-tax take home
The difficulty in accurately determining cash to the owner for small businesses is the primary reason that multiple of revenues rather than net income is used as a “rule of thumb” for determining value.
Take-home includes direct cash payments to the owner by salary or cash withdrawals as well as the cash value of “perks” such as company-paid auto, travel, etc. Obviously, this is very important to a prospective buyer.
Type of practice/nature of clients
The greater the diversification, the lower the risk to the buyer.
Residential-only practices are typically less diversified than commercial or mixed practices. They tend to be primarily lender-based, and many small practices have a large percentage from one lender. Residential lenders can be very fickle, with little appraiser loyalty. But, residential businesses do sell.
Practices with balanced commercial and residential components, many different types of clients (lenders, attorneys, private individuals, government, relocation companies, etc.), no large percentage for any one client type, and a reasonably loyal core client base are lower risk, and more valuable.
Litigation-based practices can be particularly difficult to transfer to a buyer if only the principal does the expert testimony. Often the seller has to stay on for some time doing the expert testimony work as a consultant. Having associates regularly testify makes the business more marketable, both to the associates and to an outsider.
Your most valuable assets go home at night. An appraisal company with well-skilled, high producing appraisers, and good support staff will attract buyers. Who wants to buy a practice grossing $400,000 if the owner has to work 80 hours a week with high turnover and personnel hassles?
A practice that is highly dependent on the owner, who has to be there all the time and handle all the problems is going to be less attractive to a buyer, and more difficult to transition to a buyer, than a practice that is not dependent on the seller’s personal attention.
VALUE POINT SCALE
|Location||Easy entry, not popular||Limited entry or not popular||Limited entry and popular|
|Size of practice revenues||Under $200,000||Over $500,000||200,000 to $500,000|
|Pre-tax take home||Under 15%||15%-25%||Over 25%|
|Type of practice||Residential only||Commercial only||Mixed|
|Time in business||Under 5 years||5 to 10 years||Over 10 years|
|Nature of clients||Over 50% from one client||Limited diversity||Heavily diversified|
|Personnel||No loyalty/low skills||Some loyalty, average skills||Very loyal, high skills|
|Business trends (assignments/fees)||Decreasing||Stable||Increasing|
|Favorable lease||Over 10% of revenues||5% to 8% of revenues||Under 5% of revenues|
|Office systems in place||Not much||Some||All|
|Marketing strategies||None (No points)||One or two methods||Follow a written plan|
Most buyers prefer a well-run business, with administrative systems in place and operational.
Written office procedures and personnel policy manuals, quality control systems, good cross-referenced filing systems, and computerized bookkeeping and financial management are advised. An office that can “run itself” is a valuable asset as the buyer will have a hard enough time transitioning to your clients.
A business that just “waits for the phone to ring” or does hit and miss marketing is less valuable. An appraisal practice with an implemented marketing plan that has been following it for at least several years is more valuable.
How are sales prices determined?
Generally, a multiple of gross revenues is used. This is a rough “rule of thumb” measure. Appraisal appraisal company sales available showed a range of 0.25 to 1.4 times gross annual revenues. Most of the non-corporate (i.e. Big 6 accounting firm buyer) sales sold in the .33 to .50 range. Almost all had seller financing.
Sales of assets only, i.e. furniture, files, etc. are not included in this article. Unless the assets include real estate they are typically relatively low in value.
There was no information available on how many businesses that are available for sale actually do sell. A survey was sent to 27 firms advertising in the last 2.5 years in “Appraiser News”, published by the Appraisal Institute. We received only 1 response, and 3 or 4 were returned marked “no longer at this address”. Methods used by business appraisers, particularly for marital dissolution purposes, can get complex.
Who is the most likely buyer?
Associate appraisers, out-of-area appraisers, competitors, real estate agents, non-appraisers, and large corporations have all purchased appraisal companies. For most appraisal companies the most likely buyer is an associate, an experienced relocating appraiser, or an appraiser early in his/her career wanting a fast startup.
Very few sales are all-cash, except for buyouts by large, diversified companies like TRW. Bank financing is not really an option as there are few tangible assets for security in a appraisal company. Most of the assets (people) go home at night!
Typically there is an upfront payment, often 15% to 20%, with the remainder paid either as fixed payments, or a percentage of cash flow over a specified time period, typically 3 to 5 years.
Transitioning in the buyer
Typically the seller stays on for a 6-to-12 month transition period, often introducing the buyer as a partner so clients don’t’ get too nervous.
It can be very difficult for a seller to give up control, but it is mandatory for a successful transition.
In some sales, particularly businesses with a heavy expert witness component, the seller works on a consulting basis after the sale, splitting the expert witness fees with the buyer.
Usually, an appraisal business is like a legal or accounting firm.
Associates with at least 5 years of employment are offered a partnership on a buy-in basis. They usually aren’t able to make a cash down payment, so they receive a graduated step-up partnership share. Making less as a partner than as an associate is not unusual as they are paying for the partnership by receiving a lower fee split or salary-equivalent payback.
If your name is in the business name, such as Jane Smith Appraisal Company, you can add on the buyer’s name and change to Jones and Smith Appraisal Company. “Smith” could be dropped later. If the company has been in existence for many years and has a very well-known name, the buyer may want to keep the name.
If the business name is less personalized, such as Appraisal Associates, it’s often easier to transition as new clients may be less likely to wonder what happened to the seller. Also, if you don’t like what the buyer does to your business, your name is no longer on it!
Sources of information
For this article, I spent many hours reading books and articles on selling a business and business valuation. They seemed to fall into two categories: (1) fairly simple and written by business brokers focusing on selling, and (2) very complex and written by business appraisers.
Check your local library or bookstore for books on buying and selling businesses written by business brokers. They can get you more oriented toward the desires and fears of sellers, and help you understand your own motivations and fears.
A well-written book on business valuation is Valuing Small Businesses and Professional Practices by Shannon Pratt, Ph.D., FASA, available on Amazon. To find a professional business valuation expert. go to the American Society of Appraisers at appraisers.org