Business appraisals are an economic analysis, or professional engagement, to conduct business valuation in order to determine the worth of a business, professional practice or certain business assets. They are a critical tool in any business owners’ arsenal, and should be considered right from the day the business concept originates through the life cycle of the business.
Reasons for Business Appraisal
Here are the top 10 reasons why you should get a certified business appraisal.
- Your business is in the startup phase and you need to value it to determine how much of it you will have to give to investors in exchange for seed money.
- If you’re an established business and have to provide quarterly or annual updates to your investors or other stakeholders. This will give your stakeholders a clear picture of the financial health of the business that shows them exactly what the worth of their current investment is.
- You may find an opportunity to sell or merge which needs to be decided quickly. Having an up to date business appraisal allows you to take advantage of the opportunities.
- You may want to take on a new partner and you need to know the value of your business to determine the buy-in price.
- With the array of new fundraising options available to small-business owners, it’s important to know the value of your company before you begin fundraising.
- You may want to expand or build new facilities, and taking your business appraisal to the bank will help them make the decision to lend money.
- To determine the annual per share value of an Employee Stock Ownership Plan (ESOP). ESOP is used when you want to share ownership of your corporation with your employees.
- For gift tax planning purposes such as transferring an interest to family members, donation to a charity, transfer to an intentionally defective grantor’s trust, etc.
- For litigation support purposes, to determine economic damages, lost profits, uncover fraud or value of a business in a shareholder or partnership dispute.
- To identify whether the business is growing, stagnant or declining in value to restructure the business.
Business Appraisal Techniques
Some of the business appraisal techniques are as follows:
- Asset Approach
The asset approach examines the assets of the business to determine the value of the assets of the business. This method would be particularly significant for a business that is closed down and being liquidated.
- Income Approach
This approach concentrates on the main purpose of the business, which is the income it generates through its operation. Detailed discovery and analysis of various streams of income and types of expenses are performed. Projections of future income and expenses are also taken into account.
- Market Approach
This approach treats the business as an object available in the marketplace for purchase or sale. This method relies on finding closely similar or comparable businesses in the marketplace that recently were sold.
This list is not exhaustive and there are many other reasons that a business appraisal may be needed. A certified business appraisal is a complex financial analysis that should be undertaken by a qualified valuation professional with the appropriate credentials.