How is a Broker Price Opinion Different from an Appraisal?

As a small business intermediary, we are constantly asked to valuate companies. Intermediaries need to make a broker price opinion (BPO) to help the owner make decisions on when to sell and how much he can sell the business. The intermediary also needs to be concerned if the company is sellable.  Intermediaries charge $500 to $750 for a BPO and sometimes do this free of charge if a listing is coming as well. Generally, business appraisals cost $2,500 – $10,000. Therefore, what is the difference and why would you pay someone considerably more for a value? There are two main differences.

Intermediaries may have gone through training: Intermediaries may have good methods for valuation as well as a good grip on the market but certified appraisers must follow certain standards. USPAP standards insure that the valuation follows a series of rules intended to keep appraisals free from influence and incentives. The certified appraiser’s license is at risk if he does not follow these rules. Appraisers also use a more robust industry analysis, various valuation methods, and a high level of detail inside the appraisal. Significantly, more effort and time are expended to reach the independent valuation. Adherence to the rules and standards also makes an appraisal stand up in a court of law, however it would be unlikely that a BPO could be used in court for any reason.

In order to understand the second difference, one has to explore the concept of incentives. Ask yourself the following question. What is the incentive for an appraiser to value the company too high or too low? The answer is none. The appraiser charges a robust fee for a robust appraisal. The appraiser’s incentive is to value the company accurately and keep his license.

An intermediary however is going to be paid a contingency fee if the company sells. Aligning your goals with the goals of an intermediary keeps the intermediary interested in client goals and a fair price. The reality is that a very low percentage of small businesses actually sell. Brokers have incentives to value high when competing for the business listing or low if not competing for the business listing, because it will increase the chances that the company will sell. While this practice is not ethical and not supported by most intermediaries, it is important that you understand how these incentives could impact your valuation.

Both sets of valuations can serve a purpose.  As you investigate how to get your business priced, ask a couple of questions to determine which is more appropriate and make sure you understand how incentives and certification fits into the picture.

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