Business Appraisal

What Is a Business Appraisal and Why Is It Important?

Mar 28, 2022

Have you ever wondered how much your company would be worth if you sold it right now? The thought may have occurred to you because you’re planning a business expansion or looking to pass on your legacy to the next generation.

Regardless of why you may be considering one, having your company professionally appraised will give you a good idea of where it currently stands financially. This information can be useful in a variety of business scenarios, assisting in the facilitation of better business decisions.

What Is a Business Appraisal?

A business appraisal, also known as a business valuation, refers to the process of determining an accurate and valid estimate of your company’s economic value. This process can be completed on your entire company or individual units of your company. 

Depending on the methods used in the business appraisal, some or all of the following will be evaluated to arrive at a valuation figure: your business’s financials, intellectual property, economic and industry conditions, real estate assets, outstanding debts and liabilities, as well as any other tangible and intangible assets.

Why Are Business Appraisals So Important?

A business appraisal determines today’s resale value of your business. When tracked over time, this knowledge can be advantageous when negotiating deals that may impact your company’s financial health. Timing these events, such as obtaining a business loan or bringing on a new partner, based on an optimal valuation can ensure you end up with the best deal possible. This strategy can also help set the direction for managing internal changes to your company’s structure, such as retirement planning. 

If you’re like many business owners, you may have a rough estimate of how much your company is worth. However, there is no one-size-fits-all way to determine the value of your business, and just like in the stock market, a company’s valuation can change quickly. That’s where business appraisals come in, and certified business appraisals are the gold standard of a business valuation.

The Role of a Business Appraiser: What They Do

A business appraiser is a professional who assesses the worth of a company. They must work independently to prepare a business valuation using physical examination, financial analysis, and industry comparisons. The business appraiser will use their years of experience and strong knowledge base of financial analysis, your company’s industry, and location to determine the market value of your business.

When Do I Need a Business Appraisal?

A business appraisal can almost always be helpful for the owner of a business  because it provides valuable information, but it is essential when you are:

Buying a Business – A business appraisal will assist you in determining an accurate value of the company to be purchased. This ensures that you will not pay an exorbitant amount above market value for the new acquisition.

Selling a Business – A business valuation provides you with the information you need to plan for your sale. Most importantly, that you do not sell your business for less than it is worth. Furthermore, by understanding your company’s value and why it is attractive to potential buyers, you can successfully achieve a higher selling price.

Considering a Partnership Buy-out/ Buy-in – Obtaining a valuation from a neutral party for business transactions is a common way to set an “agreed price” fair to both parties. Because company appraisals are performed objectively, the personal interests of either side of a partnership buy-out/buy-in negotiations do not influence the valuation.

Resolving Legal Disputes – Contract violations, shareholder disagreements, and divorces are significant causes of legal conflicts among businesses. If you find yourself in the middle of a dispute, a court may require a business appraisal to objectively value the business. 

Planning for Retirement/Succession/Exit – A business appraisal can be a valuable resource in your retirement, estate, and succession planning. How do you ensure that there will be enough liquidity to ensure a smooth transition to your heirs or to pay estate taxes? Knowing where your company stands today is the first step toward being able to plan for the future, and a professional business appraisal is the best way to take that first step.

Types of Business Appraisals

Business appraisers use many methods to value a business, but the main three are:

  1. Asset Value Approach 

In this method, a business value is calculated by totaling the company’s assets then subtracting the company’s liabilities to determine the company’s book value. While this method for the valuation of a company provides a basic estimate, it does not account for earnings, revenue, future growth, and other factors that can greatly influence a company’s value.

  1. Cash Flow Approach 

This method estimates the value of a business based on its current and projected financial earnings. The most common analysis using this approach is known as a discounted cash flow analysis. This complex valuation utilizes the company’s future cash flow projections and discounts the value of those future cash flows back to today. 

As such, it is more accurate than a simple asset-based valuation, but it does still rely on discretionary factors such as future growth rates and discount rates.

  1. Market Value Approach 

The market value approach estimates the company’s fair value on the open market based on the recent sales prices of comparable companies in the same sector and geographic region. This approach uses benchmarks such as ratios or multiples from recently transacted market comps to extrapolate an estimated value of your company. 

This method relies on market data, which enhances accuracy and offers simple, easy-to-understand formulas. It doesn’t depend on uncertain cash flow projections or discretionary variables, but it does rely on finding recent and relevant comparable transactions and companies, which can be difficult.

How to Get Your Business Ready for an Appraisal

The most effective way to approach a business appraisal is with honesty. Yes, it may feel uncomfortable to expose all of your company’s inner workings to the scrutiny of another person’s eyes. Still, it is the only way to ensure that the valuation you receive at the end of the day paints the correct picture of your company’s value.

As a result, be prepared to provide information about your company, such as:

  • All financial statements from the past three years (balance sheets, income statements, and cash flow statements)
  • Detail of physical assets (machinery, buildings, etc.) and intangible assets (goodwill, intellectual property, etc.)
  • Detail of all liabilities, especially outstanding loans 
  • Any budgets and financial projections for your business, especially any planned non-recurring expenses (CAPEX, expansion plans, new machinery, etc.)
  • Any information regarding your industry or competitors that might not be common knowledge 

How Much Does a Business Appraisal Cost?

Because most appraisers charge by the hour, the final cost of having your company appraised will be determined by factors such as the number of assets your company has and its size. It can range from $5,000 to over $30,000.

Given the potentially hefty price tag of a professional appraisal, you may be tempted to conduct an informal assessment of your company. This is good practice for internal purposes, but keep in mind that an internal valuation will have no legal weight. You will need the services of an independent appraiser for this.

Final Thoughts

As a business owner, it is always best to be aware of your options and arm yourself with as much information as possible. The same principle applies when obtaining a business appraisal. Ensure that the appraiser you choose to work with is certified by a relevant organization such as an Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), Certified Business Appraiser (CBA), or Certified Valuation Analyst (CVA), as well as state regulatory boards where they practice.

Then you can rest easy knowing that the comprehensive business valuation report you receive will enable you to confidently take the next business step.

  1. About the Author:

  2. About the Author:

    As a Principal at Valesco, Angie Henson serves in key roles related to new investment origination, portfolio management, and investor relations. She directs the firm’s strategic acquisition planning and program management as acting head of research and business development operations since 2002. Angie holds a Bachelor of Science from Tarleton State University and a certificate in entrepreneurial studies from Southern Methodist University.

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