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Selecting An Appraiser

Learn the new rules.

Whether it’s due to divorce, illness or the desire to retire, when it comes time to have your material handling business appraised, your first instinct is to flip open the phone book and randomly choose an appraiser based upon the flashiness of an ad. That instinct may lead you to a result you don’t like.

While the Internal Revenue Service has issued rules regarding appraiser qualifications, they are to be at best regarded as “minimums” for an appraiser. Even though appraisers now must fill these minimum requirements to hold themselves out as appraisers and do business valuations, these minimums will not necessarily get the client the best result.

The Minimal Qualifications
A qualified appraiser is a person who has either earned a professional designation from an approved organization or has approved education in the valuation field. A qualified appraiser also must have experience in the industry of the company for at least two years, must regularly perform appraisals for compensation and must not have been disqualified from practicing in front of IRS during the past three years.

It is important to realize that the appraiser can be held liable for a substantial and gross misstatement of a value if the appraiser should have reasonably known of the information. It is also important to realize that the above factors are the minimum qualifications for an appraiser or business valuation specialist. Appraisals are commonly put up to different challenges, whether they are in a court of law or at a negotiating table.

Business valuations are usually created for some very useful and important purposes, such as valuing assets in a divorce case, arranging business for succession transactions, setting up buy/sell agreements, estate planning and preparing estate tax returns. Each purpose results in unique challenges.

New tax precedents allow business owners to save a layer of tax upon disposition of certain types of business.

For instance, when a divorce case proceeds, both parties usually bring forth a valuation of the subject business. The holder of the business will desire a low value, the party hoping to be paid a high price will hope for a high value. Both valuations are done using similar methods; however, one valuation comes to a much lower figure than that of the other. Why is this? Did one appraiser cheat? Did one valuator fudge the numbers?

The answer is no. When you put together a valuation, certain assumptions are based upon reasonable conclusions of fact and law. One party in this concluded (biased as it may be) that the value of the company is much less. The second appraiser (biased as well) concluded toward assumptions giving the business a high value. Both values fall into a reasonable range.

The point is, ordinary appraisers face issues that go beyond the scope of their expertise. An accountant with experience in material handling may not be very adept at all the issues that arise in marital dissolutions or when companies break up.

The Thorough Standard
Since business valuations exist for specific reasons, the appraiser should be qualified to assist in whatever purpose for which the appraisal is being prepared. In the event of divorce, the appraiser would serve the client by being well-versed in the issues that are commonly seen in divorce cases, such as what marital property is, where the property affected by community property laws is, finding hidden assets, asset division, and child support and maintenance issues. Upon the breakup of a company, many other issues exist, including windup, outstanding tax liabilities, payout amounts and the like.

Selling and buying companies comes with issues as well. Appraisers should be extremely well-versed in tax issues. The tax structure of a purchase or sale is just as important as the sale price.

Given the number and complexity of the legal and accounting issues, it is imperative that the appraiser not only be minimally qualified, but also be qualified to anticipate legal and accounting issues while making the valuation. While the appraiser does not have to be an attorney or certified public accountant, having one on their staff or within the firm can be extremely useful. It is a useful advantage if the appraiser is an attorney and/or especially adept at financial planning.

If the appraiser has no training regarding the legal, financial or tax issues, it’s possible that the issues common to most valuations may first be encountered in court, which you don’t want.

Having the additional knowledge allows the professional to work as a cohesive synergistic unit, which allows him or her to spot issues as the valuation is determined. If the appraiser has no training regarding the legal, financial or tax issues, it’s possible that the issues common to most valuations may first be encountered in court, which you don’t want.

Selecting the appraiser ultimately should be done according to who is the best fit for the assignment, not merely who is minimally qualified or grabs your attention based upon an advertisement.

In a divorce or marital dissolution, the appraisal may have to withstand the scrutiny of a court proceeding. Generally, one appraisal is prepared for the business owner, while another is prepared for the spouse. The two appraisals prepared will generally conclude different values for the business and the court will have to decide the ultimate value. It is therefore best to choose an appraiser with a legal background to allow him or her to spot legal issues and come to assumptions that are reasonable and able to be proved in court.

Additionally, couples who are going through a divorce nearly universally hide assets. While a business appraiser may be aware of issues like this, those trained in law will be more adept at discovering and uncovering hidden assets that a business may have. During a divorce, some appraisal methods are inappropriate or even illegal in some states. This is not to say an ordinary business appraiser is insufficient, but one holding a legal degree will be more attuned to the environment of court proceedings and the generalized chaos that follows.

Buying or Selling a Business
In the selling or purchase of a business, tax and financial issues (not legal issues) are of utmost importance. If you sell stock, the seller may ask for a lower value due to easier tax consequences. In an asset sale, the valuation should reflect a higher value because the tax costs are higher. Generally, a CPA is desired in this situation. Financial and legal issues come about as well in business sales and purchases. Many CPAs are trained in this area; however, their expertise is usually limited to personal experience as opposed to actual experience. Attorneys who practice in this area can spot buying and selling issues while the valuation or appraisal is in its early stages.

Subchapter C corporations bring unique issues to the transaction. Double taxation is a big burden on most C corporation owners, especially if they have been in operation for many years. New tax precedents allow business owners to save a layer of tax upon disposition of certain types of business. This precedent is generally unknown to non-tax practitioners. A separate legal document is necessary to divide proceeds into two types of goodwill.

Dissolving a Business
Dissolving a company demands legal, financial and tax expertise. Depending on the goals of the owners, dissolving a business can be a relatively simple transaction or it can be very complex. Further, the balance sheet of the tax return can reveal deeper problems than any of the partners or shareholders imagined. Unpaid loans, negative capital balances, unpaid liabilities, zero-basis receivables and inventory can be a huge burden for the business owners during tax time. It is therefore beneficial to have an accountant who is well-versed in tax to maneuver the valuation and avoid tax pitfalls.

Estate Planning
For estate planning, having a trained legal and accounting professional can be invaluable. Estate planning, in its rudimentary form, is half ac counting and half law. The accountant prepares the figures and usually attorneys will prepare the forms. While the same accounting firm and law firm may not handle the entire transaction, having a legally informed appraiser is never a disadvantage and can assist the attorney in drafting such documents as a buy-sell agreement and/or trust documents.

Readers are cautioned when considering any transfer, whether it is a gift or sale of stock in a closely held company. Know whether your appraiser meets the qualifications of the IRS and also know that there are special tax rules governing valuation of stock when family transfers are involved. Be sure the appraiser is knowledgeable in accounting, taxes, legal matters and the material handling industry.

Material Handling Equipment Distributors Association
Bart A. Basi  Marcus S. Renwick

Meet the Authors

Bart A. Basi is an attorney, CPA and president of The Center for Financial, Legal & Tax Planning, located in Marion, Illinois, and on the Web at www.taxplanning.com. Marcus S. Renwick is an attorney and director of research and publications with the firm.

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