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Business Appraisal: Frequently Asked Questions

Do the terms "appraisal" and "valuation" mean the same thing?
Yes. It is commonly accepted and understood that these terms are interchangeable.

What other benefits do I get from having an appraisal performed?
In addition to the obvious benefit of finding the value of the subject business, there's a tremendous extra benefit to going through the valuation process.

The process compels you to take time to organize your data and review your goals for your company. Typically, just having an appraisal done will add more value to your business than your investment in the appraisal.

What does a business appraisal include?
Included is a thorough analysis of company's operating history and financial performance. In collaboration with management, a forecast of future financial performance is created and considered. Also, relevant external factors such as industry conditions are considered. Finally, by various computations, an opinion of value is determined.

Formal appraisal of real property and/or equipment and machinery if required are not included unless explicitly quoted.

Is there more than one type of value?
Yes. There are two main types: market determined and statute determined. Market value comes into play for buying or selling businesses and is stated as a selling price. Statutory values are market values as determined by state and federal law rather than real market forces. They are determined in court to resolve matters such as divorce, tax disputes, and shareholder disputes.


What is the basis for "value" in a business?
This very important concept is often confusing to business owners. Value comes from the transferable assets (both tangible and intangible) you've assembled to do business and from the expected future benefit stream (money) that those assets will
generate.

Value is determined by the highest price at which a buyer can acquire the assets and still receive a fair return on the price from the expected benefit stream.

I'm selling my business. What type of appraisal do I need?
It depends. If your company is privately owned, with 6 or fewer stakeholders, and
annual revenue is under $10,000,000, then for purposes of internal planning a low cost Restricted Use Report will probably work well.

All other situations probably call for a Full, Formal Appraisal. Call us to be sure.

What "value" will be used in my appraisal?
Since our firm specializes in valuation services for buy-sell transactions, the standard of value used will be one of the two market driven values.

Fair Market Value is the value in an arm's length transaction to a hypothetical, typical buyer.

Investor Value is the value to a specific, identified buyer and involves consideration of synergies with other business interests of the buyer.

Why are some appraisals called "Restricted Use"?
Restricted Use indicates that the report was written for a client with considerable
knowledge of the company. Also, the opinions of the owners may have been used
in areas such as fixed asset value.

Use of the term is to avoid distribution of the report to less knowledgeable readers that could potentially be mislead.

Are business appraisals like real estate appraisals?
Yes and no. Both use similar approaches in the appraisal but different methods to
consider the approaches. Major differences are the availability of market comparisons
(many in real estate, few in businesses) and the range of variation in businesses.

Will I ever need another appraisal?
An appraisal for your business is like a health check up for you. It's a snapshot taken at a moment in time and is only really valid at that moment. As long as things don't change much, however, it continues to provide guidance. It's a good idea to have your appraisal updated every year or so to see what's changing.

What are "Rules of Thumb"?
Every business person has heard that his/her business is worth three (or was it two?) times something (sales, profits, owner's ..?). Created by industry insiders to be  guideposts, application of such rules should be with great caution.

These rules of thumb are like a compass that gives us a general direction but has a huge margin of error when we rely on it to get a specific address. For getting to the specific value of your company, appraisal is to rules of thumb like GPS is to a compass. Appraisal will get you there.

How long does an appraisal take?
A typical Restricted Use Report takes 5 to 10 business days to complete. You can speed up the process by having the required information ready and organized. Also, we offer email delivery for faster service.

If you really need a report in a hurry, expedited service is available at extra charge. The fastest delivery possible is 48 hours from receipt of required information.

How does the size of my business matter?
Valuation approaches and considerations are basically the same for any size business. However, as businesses grow larger it's common to see more intricate tax considerations and more data that must be analyzed to perform a valuation. Also, it is common to see several different profit centers, i.e. business activities, operating under one corporate umbrella.

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