Business Appraisal Services

A business appraisal is an essential part of a successful sale. Business appraisals are more than just determining what a business is worth - it's also about understanding the current market and maximising the sale price.

Using data from your business, our experienced business brokers use established appraisal methods to predict what your business could sell for in the current market.

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Differences Between Business Valuation and Business Appraisal

While the terms "business valuation" and "business appraisal" are often used interchangeably, they represent distinct processes that serve different purposes. Understanding these differences is crucial for business owners and stakeholders when navigating the complexities of business evaluation.

• Business Valuation refers to the process of determining the economic value of a whole business or company unit. It is a broader concept often employed to assess a business's worth for various internal or external purposes, such as selling, mergers, acquisitions, or securing financing. Business valuation takes into account multiple factors, including market conditions, historical performance, industry trends, and future earning potential. In addition to assisting with marketing a business for sale, business appraisals are typically required for legal matters, such as divorce, estate planning, or disputes and can be used for tax reporting purposes as well.
  
  
• Business Appraisal, on the other hand, is a more informal assessment conducted by a business broker. This process focuses on determining the fair market value of an asset, business, or company at a specific point in time based on industry expertise, recent similar sales and a general gut feeling. Typically an appraisal would be slightly higher than a valuation as a business is worth what someone is prepared to pay for it.

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The Business Appraisal Process

Income approach

The most common method in business appraisal is using sales data to demonstrate the company's ability to generate income. This method estimates the present value of the projected cash flows that the business can reasonably be expected to produce in the future. This process may include:

• Forecasting Revenue: Accountants typically analyse historical financial statements and market conditions to project future revenue. This step often takes into account economic forecasts and industry trends.
  
  
• Determining EBPIDTA: After estimating revenue, the next step is to calculate net cash flows, accounting for operating expenses, taxes, and additional costs. We then apply genuine ‘add backs’ to the Net Profit of the business. Such as personal vehicle expenses, cell phone, Home office, the list goes on.
  
  
• Discount Rate: A discount rate is applied to determine the present value of future cash flows based on the risk associated with the business compared to alternative investments.

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Market approach

The market approach assesses the value of a business based on the sales of similar businesses in the market. It involves:

• Comparative Analysis: Appraisers compare your business to similar enterprises that have been recently sold. Key metrics include earnings before interest, taxes, depreciation, and amortisation (EBITDA), revenue multiples, 
  
  
• Adjustments for Differences: Not all businesses are created equal, and thus adjustments are often necessary. Appraisers will adjust the value based on differences in operational strengths, customer bases, geographical locations, and economic conditions. This ensures the appraisal reflects the unique characteristics of the subject business, accounting for both strengths and weaknesses in comparison to its peers.
  
  
• Market Trends Analysis: Understanding current market conditions is critical in this method. Appraisers analyse market trends, such as economic indicators, industry growth rates, and customer behaviour changes. This broader perspective allows for a more nuanced valuation that incorporates not just the past sales of similar businesses, but also anticipated future shifts in the marketplace.

Asset approach

The asset approach values a business based on its tangible and intangible assets. This method is particularly useful for companies with significant physical assets or intellectual property. Key components include:

• Asset Identification and Valuation: Initially, appraisers conduct a thorough inventory of the business’s assets. This includes tangible assets such as real estate, machinery, inventory, and equipment, as well as intangible assets like patents, trademarks, proprietary technology, and goodwill. Each asset is then assigned a fair market value, often informed by recent sales data or appraisals of similar items.
  
  
• Net Asset Value (NAV): After assessing all assets, the next step is to calculate the net asset value. This involves subtracting total liabilities from the total assets identified. This figure represents the equity value of the business and provides a baseline valuation that reflects what shareholders would receive if the business were liquidated.
  
  
• Consideration of Depreciation and Amortisation: Since many assets, particularly physical ones, degrade over time, appraisers must account for depreciation. Similarly, intangible assets like intellectual property may require amortisation considerations that reflect their diminishing value over a given time period. This adjustment helps in generating

How to Prepare for a Business Appraisal

Preparing for a business appraisal is a critical step that can significantly influence the final valuation. Here are some key things you can do before the appraisal process begins:

1. Organise Financial Statements

Your business broker will typically require comprehensive financial statements for several years, including profit and loss statements, balance sheets, and cash flow statements. Ensure that these documents are up-to-date, accurately prepared, and reflect a true and fair view of your business finances.

2. Conduct an Asset Inventory

Begin with an inventory of all tangible and intangible assets. This may include buildings, equipment, inventory, patents, and trademarks. Ensure that each item is documented with details on its condition, purchase date, and value.

3. Evaluate Asset Condition

Physical assets should be assessed for their current condition and market value. Items showing signs of wear and tear may require maintenance or upgrades before the appraisal. For intangible assets, it’s essential to evaluate their effectiveness and potential future value. This involves analysing factors such as market demand, legal protections, and competitive advantage. For instance, consider any patents or trademarks you may hold and assess their relevance and potential expiry dates, which could affect their appraisal value.

To find out more about the business appraisal process or book your appraisal, contact our friendly team today.

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