The Difference Between a Business Valuation, Business Evaluation, and a Business Appraisal

Business Appraisal vs Evaluation vs Valuation

Business Appraisal or Business Valuation

The terms company valuation and company appraisal are synonymous. In the recent past, business valuation has become the most accepted term representing placing a reasonable market value on a going concern business or the value of a planned start-up company. Let’s discuss appraising (valuing) a business, the steps to obtain a professional business valuation, and the evaluation of a company’s worth to reach a fair market value.

A real estate agent will know the real estate market and offer you a real estate appraisal, property valuation, or property appraisal, but that is not what we do. As a business appraiser firm, we only value businesses for business owners. For example, we do business valuations for SBA loans, estate planning, litigation support, or wealth transfer. We sometimes incorporate a third-party real estate appraisal into our business valuation work. As a business valuator, when we do valuations to Internal Revenue Service or IRS standards, many times real estate is included to create a sale value.

Business owners are looking for the value of their business or fair market value. They want the work to be bank, SBA, IRS, and the court’s standards and done by a certified business appraiser or certified valuation analyst (CVA). They also want the valuation report done in a timely manner, showing the business’ true worth and the business valuation’s cost to be reasonable versus the business value. Your business is so much more than its book value.

The True Value of a Certified Business Appraisal

You’ve heard the term “real estate appraisal” before, whether you’re a homeowner or a business owner. A real estate appraisal is a step in the purchasing and sale process that determines a home’s worth before the owner sells it. Business valuation services or business appraisal services do the same for your business.

Appraisals and valuations for businesses are more complex, but the idea is the same. A business appraisal, also known as a valuation, is a form of economic analysis that aids in determining the true value of a company or professional practice at a point in time. When a possible change of ownership of a company arises, through the business appraisal process, the owners must decide the worth of the business or fair market value, for estate tax purposes, for example.

You can also read what is a business valuation and, depending on your situation, the different types of business valuation types to give you the big picture of your company. One reason we value companies is for charitable donations of their shares into a trust for tax reporting.

What is the target use of a Business Appraisal or Valuation?

For several reasons, a business owner needs to know the true value of his or her assets. A business appraisal is a common requirement for obtaining a business loan. For instance, particularly if the lender is a traditional bank.  Partnerships often require a business valuation. This is relevant whether they are separating ownership, settling partnership disputes, or attempting to bring in a third party.

Suppose you’re gifting a portion or more of your business for estate planning purposes. Thus, you’ll need an estimate for tax purposes. Like evaluating the value of your house with a real estate appraiser before selling, business appraisals are similar. We work with certified public accountants to get us the data for your business valuation.

Who orders a Business Valuation?

It is not necessary for the business owner to order a business appraisal. It can depend on the circumstances. Those needing business evaluation services include the SBA, a lender, business owners, lawyers, tax officials, your CFA, or the courts. The purpose and intended audience will affect the valuation process and methods used to determine its value. We will also calculate your return on your investment. We will also determine the return on your invested capital for financial reporting.

Please read our article on the business valuation process.

Understanding the Main Differences in Business Valuation Approaches

A certified appraiser may use three approaches to determine the valuation of a company: the market approach, the income approach, and the asset approach. Each method will provide you with an estimate of the company’s worth but from a different perspective. Once you’ve assessed and incorporated the outcomes of all three business valuation methods, you’ll have a comprehensive business valuation.

Valuation Methods Used for a Company Valuation

• Market Approach – Competition is the driving force behind a market approach to setting the value of your company. The evaluator will look at similar businesses’ selling prices and use that data to estimate what your company is worth via the market value approach. This approach is very similar to the technique used in a home’s assessed value appraisal, except we look at comparable companies and their market value.
• Income Approach – The income approach of a business valuation is achievable through several methods. At its core, it’s the expected economic benefit and level of risk that would come from an investment in the business. Depending on the method, you can capitalize, discount, or multiply the current cash flow from your financial reporting. This may help determine the future financial value of the company. The discounted cash flow analysis or cash flow method is a method used.
• Asset Approach – This is the sum of all the intangible assets and tangible assets that make up a business. What the asset approach does is hypothetically take all the equipment, stock, and supplies and sell them separately to see what they would be worth. This dollar amount becomes a part of the business’ overall value to potential buyers or shareholders. Your liquidation value is the lowest measure of value we use for your business’s value.

The Documentation Needed for Accurate Business Valuations

A business owner must provide relevant data, paperwork, and financial information to the professional appraiser to appraise something accurately. The more current and up-to-date documentation you can offer, the more accurate the business valuation. Accurate and timely data are crucial for determining a reliable valuation for the resources invested in building a business. We want you to understand the value of a company.

A list of the basic documentation you should provide to a business appraiser for a business valuation includes the following:

• Your current capital structure.
• Your financial statements over the last three years.
• Tax returns from the last three years.
• Organization chart with lists of key employees.
• The current year-to-date financial statements.
• Portfolio valuations, if applicable.
• Lists of equipment and their expected life cycle.
• Any expected capital expenditures.
• All locations in North America.
• Any patents, trademarks, or intellectual property.
• Any business value drivers you want to share.
• The profit and loss summaries from the last three years – quarterly if available.
• A full list is provided here: Data Needed for a Business Valuation.

Business appraiser analyst

The business valuation analyst will ask key questions about your business, including your main product or service, sales process, customer profile, customer and vendor concentration, and major competitors. One of the requirements is the number of full and part-time employees. Also, provide a short description of those employees you rely on the most– or the key employees.

Do you have key employees under non-compete agreements? You should be honest and open with your professional evaluator and provide them with all the information required to get a report that accurately represents your company’s worth and business interests.

Frequently Asked Questions about Valuation Services

What Should an Independent Business Valuation Report Contain?

When a professional appraisal is completed for your business, an extensive report is delivered. It consists of much more than just numbers and financial data. A correctly executed business valuation will start with a summary of the purpose of the appraisal and its scope, along with the expected recipient and the date.

After the summary, you should find a description of the current economic conditions concerning your industry on different levels. The following reports include the financial statement, which gives the reader an understanding of the business’s economic position compared to similar companies for financial reporting.

What data will We gather for Business valuations?

We will review your financial documents including your balance sheet, profit and loss statement, tax returns, accounts receivable aging, accounts payable aging, financial reports, intangible assets list, loans, stockholder agreements, buy-sell agreements, and employee chart, among other documents. See our valuation checklist for all the valuation data we will gather.

Who is qualified to appraise a Business or offer full service valuation services?

An uninterested third party must be the one to perform the business valuation. This is a must for it to be valid. These valuation analysts are experts in interpreting data and trends. These data will help make a fair conclusion about the worth of a company or business. The results that the qualified business valuation analyst or appraiser provides you with should be both prompt and accurate. So that you can proceed promptly with the transaction that initiated the business valuation in the first place.

The typical designation is a CVA or Certified Valuation Analyst, which all the business valuation analysts at Business Appraisal Florida hold as certified business appraisers. Everyone at Business Appraisal FL|GA|HI is accredited in business valuation and the company appraisal process. We are business valuation experts with 20 years of business valuation experience.

You can also read our blog on business valuation cost and what you can expect a business valuation to cost for your specific situation.

Is a Business Valuation the Same as a Business Evaluation?

The primary purpose of a business appraisal is to determine a company’s financial value in the marketplace. A business valuation is looking at all assets concerning all risks and liabilities. An evaluation of a business measures its intangibles by assessing its operations and how effectively it generates cash flow. This tool is used to improve cash flow and profits by enhancing productivity.

Our certified business appraisers only offer business valuation services or business appraisal services and have been doing business valuations for 20+ years.

When Should a Business be Appraised?

A new business can typically wait about two years before having its first business valuation report executed unless they are venture or angel-capital-backed or is in hyper-growth mode. Having the first appraisal done in two years is a good idea. Especially if competitors have been showing an interest in buying your company. Acquisitions drive many businesses’ growth targets.

Knowing the value of your business early on is helpful for expansion plans and securing funding. An accurate business appraisal can also aid in obtaining financing from banks or other lenders. Our business valuation services comply with SBA standards.

Established businesses should have a professional business appraisal done every five to ten years. Or sooner if you are executing your exit strategy or approaching retirement age. Remember that any time a vested partner opts to leave a business, a valuation will be needed to determine their fair share of the company.

All Buy-Sell Agreements should reference two critical areas.

1. The Valuation Methodology or Valuation Firm to be used. Your business valuation is more than just a list of business assets.

2. What is the funding mechanism to buy the exiting party out? Maybe you intend on “gifting” shares to family members as a part of their inheritance. Then the IRS will want an arm’s length appraisal. When it comes to business valuations, the IRS has strict standards and prior case law referencing business valuations.

You can also read what is a business valuation report and where it maps out the components of generating the value of a business for a business valuation report.

Why Business Appraisal FL|GA|HI for Business Valuations

Whether looking for financing to expand your operations or to hand your legacy over to your heirs, an accurate business valuation is invaluable and brings with it many benefits. Arm yourself with the full economic knowledge of your business now, and you will be in a better position to negotiate your price later with our business appraisal expertise.

We have valued businesses through the United States. From Hawaii to Florida in every industry, we can help you discover the economic value of your business with our client focused business appraisals services. Whether for exit planning, purchase price allocation, taxes, or legal proceedings, we have a valuation product for you from our team of business appraisers managed by an accredited senior appraiser.

Call 561-325-9777 or email to find out what your company is worth through our professional valuation services from qualified business appraisers, and at a low business appraisal cost. We offer small business owners a fast and low-cost value of a business.

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