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A price needs to be assigned to a business in the event of purchase or sale. There are some differences between Business Valuation and Appraisal. Knowing the differences can help businesses decide the route they would like to take.
A business appraisal is a way to conduct an unbiased analysis or evaluation of the business. A business appraisal is a value that a business appraiser would state. It is the price that they think it would sell for. And the value they determine is based on a lot of factors like – potential, loans, assets, liabilities, net profit to owners, suppliers database, client database, patents, trademarks, website traffic, unique location, goodwill, leasing terms, market competition, and so on.
A business is not just about the numbers in the balance sheet; it is the entire package. The price is determined based on the same. Hence when the different appraisers conduct the business appraisal, the price would differ. Sometimes it matches the expectations of the owners, and sometimes it can be completely off.
Hence the exact price of the business can not be determined by appraises, keeping in mind the complexities involved in the measurement of the various factors. Hence it can be described as an ‘educated guess’. The appraiser can look at the balance sheet, and having knowledge of similar businesses and what they can fetch in the market, the appraiser can give an approximate value.
An appraisal is based on the intentions and knowledge of the appraiser and hence may not be the best way to get a value determined. Nevertheless, the appraisal by multiple appraisers can give the business owner an insight into the factors defining the value of the business and the facets the owners could be overlooking.
The business appraisal is not legally binding and hence must be used only to understand the value of business better.
Business Valuation is a process and set of procedures used to determine the economic value of the owners’ interest in the business. It is the price that financial market participants are ready to pay or receive to affect the business sale. A business valuation is conducted by an accredited valuer and has defined methods and mathematical calculations that back up the value determined.
The methods used for the valuation of business are:
The business valuation reports can be used for legal proceedings and generally cost a lot of money.
The major differences between a business appraisal and valuation are as follows:
|Point of Distinction||Business Valuation||Business Appraisal|
|Uniformity in Valuation||Yes||No|
Hence depending on the purpose of determining the price, the owners must choose between the two methods.
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