The Role of a Business Appraiser in an M&A Deal
Business appraisers are people who offer the service of valuing a business in preparation for an M&A deal. Sometimes this service is offered as part of another advisor’s product offerings; for example, many investment bankers and business brokers also offer the service of appraising a business and determining valuation.
Business appraisals merely put a valuation number in Seller’s head, and that number quite often doesn’t make any sense because the appraiser’s valuation techniques are mostly guesswork. Sure, the guesswork can have impressive methodology, but the only true measure of a company’s worth (what someone else will pay for it) is missing from any and all academic exercises.
Beyond providing a number rooted in no rational basis, the appraisal may raise Seller’s expectations and cause him to reject the market value of his company. Worse, the actual market value of a company may be perfectly suitable to fund Seller’s desired lifestyle, but that high appraisal number may lead him to opt against selling the business.
Business appraisals can be counterproductive, if not downright destructive, to wealth creation. As an example, one company (Company A) approached by an acquisition-minded Buyer ultimately had to pass on the offer. The owner was interested in selling, and the offer price was suitable for his needs, but because the company had an employee stock ownership plan (ESOP), it was required by law to have an annual appraisal.
The last appraisal valued the Company A at 15 times earnings before interest, taxes, depreciation, and amortization (EBITDA), which was significantly above our offer price of five times EBITDA. Because the owner had a fiduciary responsibility to his employees (because of the ESOP), he was unable to accept the offer.
As a result of an inflated and ultimately arbitrary appraisal price, the owner was unable to do a deal.
The upshot was that an illiquid asset remained illiquid, no taxes were paid as the result of the sale, no fees were earned by the advisors, and the business didn’t receive a new owner who would have invested in the business, possibly creating more opportunities for the existing employees and employees yet to be hired.
What do Buyers think of an appraiser’s valuation? They don’t. The valuation an independent appraiser, someone with no skin in the game other than the fee he’s charging Seller, is of zero value to Buyer. People in the M&A industry may say otherwise, but they’re just being nice. A business appraisal isn’t worth the paper it’s written on.
Bottom line: Sellers should let the market decide the value of their businesses.