Collecting Documentation of Assets as an Appraiser
Like Mr. Horning explained to me in our previous article interview, there will be times in the trade of business appraisal when human error will affect how fast or accurately valuations are conducted.
He went on to explain to me that one of the seemingly simpler initial steps, the collection of the correct documentation for an appraisal, can itself sometimes even be a challenge, depending on how prepared the business owner is.
“If it is a really important piece of paperwork,” he said, “such as a missing invoice, I can usually contact someone in, say, their Accounting department to help me out. Attaining the right photos can also sometimes be a problem, because at times a business may not have a lot of good ones on hand.”
“So, what you’re saying is that, in a lot of instances, you’re not only talking to the business owner themselves when you are doing a business valuation, but to many other employees within the company in order to do your appraisal as accurately as possible,” I assumed from his explanation.
“Right. It can sometimes take several more days than planned to do the complete appraisal. But, it will always be a better decision to take the extra time to get everything right than to try to rush and expedite the process, and end up failing to collect the right asset documentation.”
Assembling the Correct Documents for a Business Appraisal
“I, of course, will not call out the names of any past companies that I’ve worked with here in this interview,” the well-versed business valuator from Circleville, Ohio began. “But, yes. I have had some occasions where attaining the right asset paperwork for certain items has made conducting an appraisal a longer, more challenging process than it probably had to be.”
“Would you mind going into a little more detail about what you mean when you say ‘more challenging’?” I asked.
“Sure. Okay, let’s say for example I get requested to do a business appraisal on a construction company. And, let’s say that this company has a lot of equipment that changes and is updated on a pretty regular basis. With a company like this, it is important that the owner can get his or her hands on the related asset paperwork without too much trouble, so that I can more precisely appraise each item. Surprisingly, there are times when the owner themselves may not have the correct information.”
I was confused as to how the owner of a business could be so out of the loop. “Why is that?” I asked. “I mean, how does that happen if they are the owner?”
“Well, business owners usually rely on their accountant to prepare a list of assets because the accountant has a legitimate need for that list — to be able to calculate the depreciation expense. And, for business owners, the higher the depreciation expense, the lower the taxes they will pay.”
I looked up from taking notes.“What?” I asked. “Increasing an expense is a good thing?”
“For depreciation, yes,” Mr. Horning responded, “because depreciation is a ‘non-cash expense.’ When you increase depreciation, you don’t write a check for that — it is a paper exercise which allows a business to deduct the expense associated with the wearing out of their equipment.”
Asset Schedule/Depreciation Documentation
“So, the Asset Schedule’s primary importance is for depreciation calculation…” I said to Dave after blending all the info he’d told me together.
“Yes, and therein lies the problem,” the knowledgeable Appraiser responded. “When a business asset is still being used after the length of the time it can be depreciated, it is called “fully depreciated.”
The Corporate Finance Institute defines ‘fully depreciated’ as “an asset that is worth the same as its salvage value (CFI, 2024), meaning that it has reached its end of useful life, and the asset has an impairment that has caused it to be written down to zero.
“So, a fully depreciated item can still be in use by the company, correct?” I asked.
“Yes,” he responded. “But, when an asset is fully depreciated, most accountants will write it off the books, and simply erase all evidence of the asset. They do this because accountants want to minimize tax liability, which is the amount of taxes a business owner must pay. And, in some states, there is a business tax on the assets of a business.”
“So, what you’re saying is that the accountant is doing the business owner a favor by crossing off the Asset Schedule any fully depreciated assets…”
“Yes, for the purpose of reducing taxes, but not when it comes time for a valuation. The appraiser wants to know about ALL of the assets that are being used, even if they are fully depreciated.”
An Example of an Item Being Crossed Off an Asset Schedule
“Let’s assume that a manufacturing operation receives bulk shipments of a liquid raw material,” began the long-time member of the Ohio Business Brokers Association. “They would purchase a large 5,000-gallon bulk tank to hold the raw material and feed it into their factory as it is needed. The tank could be made of stainless steel and have a useful life of twenty years. But, the IRS will allow the business to depreciate the asset over five years. The business gets a higher depreciation expense and lower tax liability by using a five-year life for depreciation purposes. In year six, if the accountant crosses that tank off the Asset Schedule, it is gone as far as documentation is concerned. It still has a useful life of fifteen more years. Still, very often, the ‘Asset Schedule’ is called the ‘Depreciation Schedule’, which shows that this is a common problem.”
The IRS defines ‘depreciation’ as “an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property” (Internal Revenue Service, 2023). To go a little further, The Harford describes a ‘depreciation schedule’ as data that “charts the loss in value of an asset over the period you’ve designated as its useful life, using the accounting method you’ve chosen” (The Hartford, 2024).
“A good business appraiser will do a site visit, inspect the facility, make a list of all visible assets, and then check the Depreciation Schedule to see if any are missing,” Mr. Horning continued. “If there are some missing, it will call for a deeper dive. A good business appraiser will want to make sure that ALL of the useful assets of the business are listed to increase the Asset Value of the business.”
Communicating Well With the Business Owner About Documentation
“What happens if, say, certain pieces of documentation simply cannot be found?” I asked the skilled Midwest business appraiser. “I mean, would it completely stop you from doing the appraisal of that particular business altogether?”
“Hmm, good question,” Dave responded. “Well, it just depends on what the business owner can provide themselves without involving their staff.”
“Why is that?”
“When a business owner wants an appraisal, if it is for estate planning, then involving the staff is no problem. But, if the appraisal is being done as part of a preparation for a merger-acquisition, then maintaining confidentiality is important.”
Contact Dave Horning Today for Accurate Business Appraisals in Ohio!
“Overall, having honest communication with the business owner is important,” Dave said. “Many times, they will express to me that they want to keep this confidential and NO ONE should know! But then, they’ve already told their administrative assistant, and then everyone knows. That can make it difficult to retrieve the right documents. In my experience, if I can talk with one or two other people within the company other than the owner themselves, it helps to get everything I need.”
“So, you would like to speak with others,” I asked. “I mean, it’s not, like ‘extra work’ in your opinion.
“No, I like to do it. Especially since most business owners are always so busy. And this also applies to their attorney and lawyer. Here’s something I found very interesting: if I can talk with their insurance agent, they know more about the risks associated with the business than anyone else. That is a big help — forewarned is forearmed! In negotiating a merger-acquisition deal.”
Dave has recently informed me that he not only does business appraisals for the good folks of the State of Ohio, but in other states as well. So, if you are reading this and are interested in his expert services, then do not hesitate to contact him directly.
The easiest way to contact Dave for business valuations is by message at his Ohio Business Brokers Association page.
You can just send him a message here.
Or, you can email him at dave@davehorning.com.
