Upfront Appraisal or Valuation Fees by Business Brokers
By Willard Michlin
January 23, 2018
I live in California, where upfront fees are illegal. The way brokers can get around this in California is to charge for an appraisal and be paid for it. After the appraisal is completed, the broker can ask for and receive a listing. If the listing is given before the appraisal is done and paid for it is illegal. Or done as a condition of the listing it is considered an upfront fee and again is illegal.
As a CPA, I have found that most business books are not in a marketable form. I would therefor charge an accounting fee for putting the books in proper form. I might also charge for a CPA business evaluation. This would be usable for any business purpose in addition to selling a business.
In years past when someone asked for an upfront fee, it turned out they were in fact not licensed real estate agents in the same state. They worked for a marketing company that offers to advertise the business only. This would be equivalent today of one of the many “Business for Sale” websites found on the web. These websites do not have personal contact with the business and sellers. They make their money by charging large marketing fees and commissions. They did this because they were out of the jurisdiction of the applicable licencing agency so they did not follow the licencing requirements.
If you are approached by someone requesting an advanced upfront fee, do this. Go on the Internet and research the individual and the brokerage firm they are connected to. Make sure they are licensed, if one is required, in the state in which the business resides. Also find out about their level of experience and knowledge. In many cases you will find that they have very little experience, and therefore need to charge an upfront free to make a living. In truth a broker might be entitled to an upfront fee, if it is legal in the subject state, and the business is large enough to justify extensive work in putting together a marketing package. This would not apply to a business selling for $500,000 or less but might be reasonable for a business selling for $2 million.
Hiring a Business Broker
What you should expect from a newly engaged broker? You should expect that they are going to ask for a lot of information. This list should include: three years financial statements, Federal tax returns, payroll tax returns, list of equipment, and a history, from you, the seller, of the business. I always like to see a write-up of what makes the subject business unique in its industry. The seller should expect the broker to be very interested in how the business is operated and what the unique selling points of the subject business are. Another important question that should be asked of the seller is for a list of expenses deducted out of the business that were really for the benefit of the owner and his family and were not necessary to the operations of the business. These items are called sellers discretionary income (SDI) items. They are added back to the profit or loss shown on the tax return’s income. This list includes owner’s salary, medical expenses, life insurance, pension contribution, non-business travel and non-business entertainment.
By the way, without all the information mentioned in the above paragraphs, an appraisal of the businesses can not result in an accurate value. Appraisals primarily are based on cash flow generated by the business, which then can flow to the seller as income or benefits. This is why you need help to evaluate a business before you buy it.