What is the Difference Between a Business Appraisal and a Business Valuation
It's important to understand the difference between a business valuation and a business appraisal when buying or selling a business. Unlike Real Estate, there are many more factors that go into a businesses sale price. So understanding how this price was determined is important.
When you call a local business broker this is what they tend to provide. It is an appraisal of your business - in other words what they think it would sell for. Now, anyone who owns a business knows there are many factors that go into their businesses operation. It's never as simple as 'profit vs loss'. You will notice, if you call 2-3 brokers for an appraisal they could give you completely different numbers. Sometimes you will find these numbers are meeting your expectations, other times it may be well below. Why is this? Because business is complex.
There are many factors to consider such as; potential, loans, assets, liabilities, net profit to owners, operating owners income, client contracts, supplier contracts, changes in local environment, patents, trademarks, website traffic, social media presence, unique location of the business, goodwill, leasing terms and conditions and so on.
A business appraisal tends to be performed over the phone after about a 30min conversation. It's near impossible for someone to give you an accurate appraisal without considering all the facets of your business. The appraisal is a bit like an 'educated guess'. Brokers have seen what other businesses are on the market for, they look at your P&L and they make an educated guess on what they think you could get for your business.
This opens up a few problems. Does the person who is giving the appraisal really understand your business and is the number they are providing true and accurate? Or is it being used to lure you as a client. If they say your business is worth $50,000 more then another person - will they get you this price, or are they just promising you something that maybe they can't deliver on.
An appraisal is not legally binding, it is an educated guess. So to make sure you are getting a fair idea of your businesses worth - collect multiple. Call a few brokers who operate in your area and have experience with your industry. See how many questions they ask and what value they place - you could be surprised.
This is performed by an accredited business valuer. The valuer may have have accreditation from an organisation such as the Australian Institute of Business Brokers (AIBB), Chartered Accountants Australia, or API
Whilst most business valuers tend to be Chartered Accountants, they can also be Business Brokers who have expanded their training. Once accredited valuers are able to produce documents that can be used in a number of situations such as:
- Selling a Business;
- Litigation and court proceedings;
- Taxation requirements,
- Insurance requirements;
- Planning for the future.
$3,900 seems to be a current price for business valuations on businesses under $3,000,000. These valuations are independent of the owner and provide a clearer picture of the businesses situation. When selling a business these reports can be helpful to the buyer in performing due diligence and obtaining a loan.
Should I Get an Appraisal or a Valuation?
Appraisals tend to be free. They are part of the marketing for brokerages and is a way of gaining a connection with sellers. There is nothing wrong with appraisals, but buyers and sellers need to be aware that it's not conclusive. To see what various experts in the industries think your business is worth its a good idea to collect multiple appraisals and compare them.
Business Valuations cost in the thousands for a reason. The Valuers will delve into all aspects of your business to come up with a figure they believe the business is worth. It takes hours of time and specialised knowledge to perform a valuation. They will produce a report which is often used in court proceedings to settle disputes.
Notes for Buyers
It's important you get an independent review of any business you are purchasing. If an appraisal has been performed it was most likely done in the interest of the seller. Obtaining a clear valuation of the business you are buying could save you thousands in costly mistakes.
It's important to seek professional advice when buying or selling a business. This is not considered professional advice. Bsale is a marketing platform that can assist with the marketing and promotion of your business sale.