Business Appraisal vs. Valuation: What’s the Difference?

Imagine owning a successful company that hits every target metric you set for it. You’ve far surpassed the 20% of businesses that fail during their first year. You decide you finally want to sell your business, but you face a major obstacle.

You don’t have any idea of how much your company is worth. You might also wonder if your business needs an appraisal or evaluation. Understanding the difference between business appraisal vs valuation is crucial for getting the right results.

This will also help you avoid pitfalls you may have otherwise encountered. Let’s explore the most important information to keep in mind.

What Is the Difference between Business Valuation and Business Appraisal?

Many people wonder “How to value a business” but are confused between appraisal and valuation. The purpose of an appraisal is to assess a company’s monetary value in its market.

This is often a concrete number, such as $1 million. On the other hand, business valuation considers all risks, liabilities, and assets.

This result is more subjective and could influence how someone perceives the overall value of a company. For example, let’s assume that your company is appraised at $1 million but has a large number of risks and liabilities. Despite its market value, buyers could be apprehensive about purchasing it.

What Does a Business Appraisal Mean?

It’s crucial to understand how appraisers determine value. This involves hiring a professional to appraise your company in a handful of different ways. Listed below are the three most common.

The Fair Market Method

This considers all furniture, vehicles, intangible assets, and equipment. Fair market value is what your company would sell for in an open market.

The price is determined by a willing seller and willing buyer. Many people find this to be one of the most objective ways of appraising a business.

Capitalization of Earnings Valuation

This determines a company’s value based on its projected future earnings. It involves working backward from a certain point in the future by extrapolating current data. For example, let’s assume your company currently generates $1 million dollars per year in revenue.

Last year, it generated $500,000 in revenue. Two years ago, it generated only $250,000 in revenue.

Three years ago, your company made approximately $125,000 in revenue. Using this data, you can reasonably conclude that your revenue tends to double from year to year. Aside from contingencies like economic downturn, it’s likely your company will continue to do so.

Your appraiser might determine that your business will generate over $2 million in revenue within two or three years. You can then use this as a selling point to help find buyers.

Liquidation Value

Liquidation occurs when a business ceases to operate and sells all of its assets. This is the least favorable form of appraisal, as the owner will receive minimal value. Since assets need to be sold quickly, they’re often sold for far less than they’re worth.

You may have seen advertisements in the past for a liquidating company that’s selling its inventory for a fraction of what you’d typically pay. Keep this answer to “How do you appraise a business” in mind.

How Much Does It Cost to Get a Business Appraised?

While a business appraisal isn’t free, it doesn’t cost a substantial amount of money for what you get out of it. The amount you pay will depend on a variety of factors.

One of the most prominent is the appraiser’s experience. People who have been around in the industry for decades will likely charge more than someone with less experience. Your company’s complexity will also play a role.

Complex businesses will take longer to appraise, meaning the appraiser will require more compensation for their time. The same concept applies to owners who wish to appraise multiple businesses. However, appraisers are often negotiable.

Find one who’s willing to talk about your needs and work with you to provide the best value for their services. Keep in mind you may not find an appraiser willing to settle for the price you request.

However, it’s always worth choosing someone who will negotiate. In general, hiring an appraiser costs anywhere from a few thousand dollars to tens of thousands. It’s best to prepare for the higher end of the spectrum so you can accommodate this obligation.

Finding a Solution

To find the right solution, you’ll first need to determine your needs. Understanding whether you need an appraisal or valuation can save you a substantial amount of work during your search.

Afterward, it’s imperative to find someone with a solid reputation. See what other clients have to say about the experiences they got. Were they satisfied overall?

Did they encounter issues the professional couldn’t help them resolve? Answering these questions will ensure you avoid costly issues.

Are they easy to communicate with? To get the ideal results, you’ll need to find an appraiser who can break down the fine details of their service.

They should have no trouble helping you understand why they appraised your business the way they did. They should also be able to point you in the right direction if you wish to sell your company.

Price is another factor to keep in mind. You often get what you pay for, so avoid appraisers who charge rock bottom rates.

This is often indicative of poor quality service. However, you don’t always need to pay as much as possible.

Some appraisers charge large amounts simply because they work for a large firm or because they’ve been in the industry for a while. More often than not, working with an appraiser in the middle of the price range can help you save money and reach your goals.

Understand Business Appraisal vs Valuation

As long as you understand the nuances of business appraisal vs valuation, you can make the decision that’s most appropriate for your situation. From here, you’ll help minimize the time the transaction takes and maximize the amount you get for your company.

Gulfstream Mergers & Acquisitions prides itself on helping entrepreneurs find buyers for their companies as quickly as possible. Our decades of combined experience ensure our clients make the ideal choice. You’ll learn more about how we can find the right buyer when you get in touch with us today.