Business Appraisal
A business appraisal is a valuation method to determine your business’s worth. The “gold standard” of a business valuation is the certified appraisal. With a certified appraisal, a professional appraiser uses various methods to determine the true value of a company’s assets to determine its overall value. Small business owners need to have their company appraised periodically for multiple reasons, such as selling the company, buying out a partner, settling a lawsuit, or applying for certain small business loans. Certified appraisers dig beneath the financial data when determining your company’s value. They typically use three valuation methods to estimate a company’s worth.
The asset method, also called the cost valuation method, involves calculating the total value of your assets as listed on the balance sheet. Then the appraiser subtracts the value of your total liabilities from the balance sheet to determine your company’s total present equity. When appraisers use the asset method, they usually use a book value approach or adjusted net asset approach. With a book approach, the appraiser uses the book value on the balance sheet. With the adjusted net asset approach, appraisers determine the fair market value of your assets.
The income approach is straightforward. Appraisers conduct a cost-benefit analysis to determine the overall value of the company. The benefits include profits, increased value, etc., while the costs include required operating capital, ownership risk, and liabilities. This is sometimes called the income capitalization technique.
The market approach is the most subjective of the three and is like how mortgage companies perform a home appraisal. The appraiser determines the value of the business based on comparable companies in the same industry and market. This includes looking at the sales price of similar businesses, especially those that are a similar size.
The terms “business appraisal” and “business valuation” are largely synonymous and used interchangeably. However, some businesses might create a distinction between the two.Business appraisal is more commonly associated with the total value of a business’s tangible assets. Business valuation often refers to a company’s total value, including intangibles like intellectual property, market share, and brand recognition. Because of this, there’s been a recent trend to move away from business appraisal terminology and use business valuation instead. However, the most reliable form of business valuation remains certified appraisal.
Various financial professionals, such as certified public accountants (CPAs), can perform an uncertified valuation, but the most qualified business appraisers are certified. It may seem obvious, but only a certified business appraiser can conduct a certified appraisal.Certified business appraisers follow industry-wide business valuation standards. They must pass certification criteria such as providing professional references, submitting a valuation for peer review, completing a training program, and passing an exam. Several organizations issue professional designations. Credentials will include at least one of these certifications:
Business appraisals give you a more accurate understanding of the value of your assets from an objective, third-party source. It’s an excellent way to look at the actual value of your business.Understanding your company’s value, and having documentation to back it up, is essential for the sales process. Whether trying to sell your ownership stake or buy out a partner, having an appraisal lets you set a fair price. The valuation also becomes useful during mergers and acquisitions. If a larger company approaches you about merging with your business, the appraisal lets you set the parameters of how that process will work. If you’re trying to acquire another company, getting it appraised helps you avoid overpaying. Investors tend to check business valuation reports, and having your business appraised could help attract investors. This is especially true if you can demonstrate an increase in value over time.
Business valuations can be costly and time-consuming, especially when getting a certified appraisal. Your business might spend several thousand dollars, and it could take several days or weeks to get the report. Most appraisals can’t predict a company’s ability to stay in business for a long time. While the appraisal gives you an idea of how much your company is worth now, that assumption could change. Another drawback is that it could be challenging to find comparable businesses to your own. Appraisers might not be able to determine a market value for your company without that data. The best business valuations use a combination of multiple approaches to determine a business’s worth. Relying on only one appraisal method could prevent you from getting your company’s true value.
The business valuation cost can vary significantly depending on your company’s size, industry, and appraisal type. Uncertified business valuations can start at $500 for small sole proprietorships. However, most business valuations are much more expensive. Certified appraisals start at $5,000 and could go up to $20,000.
Small business owners must provide multiple financial documents when conducting a business valuation. Examples of documents you must provide include the following: