Business Appraisal Guide
Paul Cronin
January 22, 2024 ⋅ 3 min read
How do business appraisals work? How do I find a business broker to sell my business? What’s a fare price to list my business for sale at? If you’re google any of these questions as a small business owner, you’ve come to the right place. Baton’s team of sales experts has compiled a guide for you to learn about how business appraisals work.
Business appraisals, also known as business valuations, involve the assessment of a business's overall worth. The process is conducted by professionals, often called appraisers or valuators, and it aims to determine the fair market value of a business. Here is an overview of how business appraisals typically work.
Engagement and agreement
The business owner engages with a qualified appraiser or valuation firm. The engagement may involve a formal agreement outlining the scope of work, the purpose of the appraisal, and any specific requirements.
Gathering information
The appraiser gathers comprehensive information about the business, including financial statements, tax returns, customer contracts, industry data, market trends, and other relevant documents.
Interviews with key personnel, management, and stakeholders may also be conducted to gain a deeper understanding of the business.
Determining the purpose of the appraisal
The purpose of the appraisal significantly influences the valuation approach and methods. Common purposes include selling the business, estate planning, mergers and acquisitions, litigation support, and financial reporting.
Selecting valuation methods
Appraisers use various valuation methods, and the selection depends on the nature of the business, industry standards, and the purpose of the appraisal.
Common valuation methods include the Income Approach, Market Approach, and Asset-Based Approach.
Income approach
The Income Approach evaluates the present value of the business based on its expected future income or cash flows.
Methods under this approach include the Discounted Cash Flow (DCF) method and the Capitalization of Earnings method.
Market approach
The Market Approach compares the subject business to similar businesses that have been sold or are publicly traded. It seeks to determine the business's value by looking at comparable market transactions.
Methods under this approach include Comparable Company Analysis (CCA) and Precedent Transaction Analysis.
Asset-based approach
The Asset-Based Approach assesses the value of the business based on its tangible and intangible assets. This can include book value, adjusted net asset value, and liquidation value.
Normalization adjustments
Appraisers often make normalization adjustments to financial statements to account for non-recurring expenses, owner's perks, and other factors that may impact the accuracy of financial information.
Discounts and premiums
Depending on the context and purpose, appraisers may apply discounts for lack of control, lack of marketability, or other factors.
Premiums, such as a control premium, may be considered in certain situations.
Final valuation report
The appraiser compiles all the analysis and findings into a comprehensive valuation report. This report includes details about the methods used, assumptions made, and the final determined value of the business.
The report is typically presented to the client, who may use it for decision-making, negotiations, or other business purposes.
Business appraisals are complex, and the process requires a deep understanding of finance, accounting, industry dynamics, and valuation principles. Working with a qualified appraiser ensures that the appraisal is conducted in accordance with professional standards and provides a reliable estimate of the business's value.