How Are Businesses Appraised?

Understanding the value of your business is a critical step for any business owner considering selling their enterprise. Business appraisals shed light on your business’s financial health and potential market value, allowing you to make informed decisions about its future.

But how exactly is a business appraised, and what are the main steps involved in the process?

This blog explores the key steps in the business appraisal process and highlights how Barker Business Brokerage can ensure you achieve maximum value for your business.

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What Is a Business Appraisal?

A business appraisal is an evaluation of a business's financial health, performance, and market position to identify its likely market value when the owners are considering selling their business. This often helps owners in deciding whether to sell now or continue trading and improve the business.

The appraisal also highlights upfront costs and success fees, giving potential sellers invaluable clarity about the sale process.

Why Is a Business Appraisal Important?

A business appraisal serves several purposes, including:

• Determining a likely selling price: Provides the vendor with an estimate of their business's market value.
• Informing decision-making: Helps decide whether to sell or continue trading based on the current valuation.
• Preparing for market demands: Offers insights into potential costs for the sale process and success fees for a successful sale.
• Reality-checking the business's readiness: Highlights weaknesses and opportunities for improvement before listing the business.

Key Steps in a Business Appraisal

Here’s a breakdown of how a business is appraised, step by step.

1. Gaining an Understanding of the Business

The appraisal begins with a detailed discussion between the business broker and the owners. Whether it’s through a meeting or phone calls, this step helps the broker understand the business’s operating history, values, market position, and objectives.

2. Reviewing Financial Reports

An essential step is assessing past and current financial reports to evaluate the trading history and profitability of the business. Accurate and up-to-date records give clarity on how the business has performed over time.

3. Conducting Market Research

This stage involves analysing the business in its market context. By researching the industry and assessing market demand, the appraiser gains a fuller picture of the business’s external standing.

4. Calculating Cash Surplus (EBITDAP)

An important financial metric used in business appraisals is EBITDAP – Earnings Before Interest, Tax, Depreciation, Amortisation, and Proprietors' Earnings and Discretionary Costs. This calculation adds back one working owner’s earnings, discretionary expenses to obtain the true cash surplus generated by the business.

5. Benchmarking Against Market Statistics

Your business isn’t appraised in isolation. The broker will compare its profits, turnover, and asset value against similar businesses that have recently sold, providing an indicative price or price range.

6. Outlining Sale Costs

An appraisal doesn’t simply end with the value of the business. At this stage, the associated costs of selling, such as commission and set-up fees, are assessed and transparently shared with the business owner. This ensures a clear view of future costs.

How Can You Maximise the Value of Your Business Appraisal?

Here are some tips to help ensure you receive a comprehensive and well-rounded appraisal for your business:

• Maintain accurate and clear financial records: Well-organised financial statements and records build confidence with brokers and potential buyers.
• Disclose all relevant information: Be upfront about the state of the business and the market to help the broker develop an accurate appraisal. Anything negative that isn’t disclosed during the appraisal process can derail a sale during due diligence later on.
• Optimise operations before appraisal: Address inefficiencies and liabilities that may reduce the perceived value of your business.

Why Choose Barker Business Brokerage?

When it comes to building trust and maximising value, Barker Business Brokerage stands out as an industry leader. Here’s why we’re the ideal choice for your business appraisal and sale needs.

National Reach and Industry Expertise

With over 15 years of proven success, Barker Business Brokerage operates nationwide throughout New Zealand. Our team of award-winning brokers brings in-depth expertise in diverse industries, from hospitality to industrial manufacturing, ensuring you get tailored advice specific to your sector.

Comprehensive Marketing Strategies

Our approach guarantees your business is promoted to the right audience through time-tested marketing techniques. With access to a large, qualified buyer database, we ensure you’re matched with prospects who see the full value of your enterprise.

No Sale, No Commission Policy

With Barkers, we only earn a commission after successfully selling your business, highlighting our commitment to delivering results.

Dedicated Support Throughout the Sale Process

Whether you’re seeking guidance on succession planning, need a free business appraisal, or want to understand the intricacies of selling a business, the Barkers team is with you every step of the way.

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