What Does a Business Appraisal Include?
Obtaining a business appraisal is crucial for business owners and advisors who want to understand a company’s value. Business owners often choose to obtain a business appraisal when buying a company, selling a company, securing financing, or navigating divorce. No matter the circumstance, knowing what a business appraisal includes is important.
Business appraisals are conducted by valuation experts who use tools to help you learn the fair market value of a business. This process promotes informed decisions based on accurate financial data. In this article, we break down what a business appraisal includes and how you can take advantage of a business appraisal.
Peak Business Valuation is a trusted and experienced business appraiser in the United States. We have helped thousands of business owners gain key insights for better business decisions. If you have any questions about what a business appraisal includes, schedule a free consultation with Peak today!
What Is a Business Appraisal?
A business appraisal is the process of analyzing a business to learn its value. During this process, business appraisers follow several crucial steps to ensure accuracy and reliability. This includes gathering and assessing documents and using various methods to determine value. In addition, a business appraisal provides an in-depth analysis of the business. As a result, one of the primary benefits of obtaining a business appraisal is having supported data to guide your business decisions.
Consult with a Business Appraiser
The first step in obtaining a business appraisal is a consultation between the business appraiser and the potential client. During this phase, a certified business appraiser will ask questions to understand the unique aspects of the business. Peak Business Valuation offers a free 15-minute consultation to help clients gain a clearer understanding of what a business appraisal includes. Moreover, we answer any questions and determine valuation needs.
This consultation is vital for aligning expectations and addressing any concerns before moving forward with the appraisal process. Additionally, at the end of the consultation, you will receive an engagement letter detailing the business appraisal process. Prepare for your free consultation with Peak by reading Questions to Ask a Business Appraiser.
What Does a Business Appraisal Include?
Below, we highlight a few of the main sections a business appraisal will include. For questions about how to obtain a business appraisal, schedule your free consultation today!
Analysis of Key Success Factors
First, while analyzing a business, business appraisers will look at key value drivers. Key value drivers are variables that can either increase or decrease value. Being aware of these factors in your industry or business can help you plan well for the future and avoid common pitfalls. Learn more about increasing value at How to Increase the Value of Your Business.
Learning the factors that contribute to the success of your business is crucial. For this reason, Peak Business Valuation is happy to help you with useful insights to improve your business’s performance. Schedule a free consultation today and start the business appraisal process!
Valuation Methods and Approaches
Next, a business appraisal includes the results of the different methods used during the business valuation. Valuation methods can vary depending on the business’s financial standing, industry, location, and economy. As part of the appraisal process, a business appraiser determines the most applicable methods for your company.
The most common valuation approaches are:
Income Approach: This method estimates the value of a business based on its ability to generate income in the future. This is ideal for businesses with consistent and predictable earnings. It also addresses key risks of the business.
Market Approach: The market approach compares a business to similar businesses that have recently sold. This method involves using market multiples (such as sellers’ discretionary earnings, EBITDA, or revenue multiples) to estimate what a buyer might pay for a similar company. You can read more at What is a Valuation Multiple?
Asset Approach: If a business is reliant on assets such as buildings or equipment, a business appraiser is likely to use the asset approach. This approach focuses on the net value of a business’s assets. This can include property, machinery, inventory, and intangible assets like intellectual property or patents. See What is a Machinery and Equipment Appraisal? for more information.
Valuation Discounts and Other Considerations
In some cases, discounts are applied to the final valuation to account for various factors. Two common discounts are:
- Discount for Lack of Control (DLOC): This discount is applied when the interest being valued is a minority stake. This means the shareholder does not have full control over business decisions.
- Discount for Lack of Marketability (DLOM): This discount is applied if the business is difficult to sell or if there is a limited market for the shares of the company. For example, if a company’s stock is not publicly traded or if there are few buyers in the market, this would reduce the business’s value.
These assumptions help clarify how the valuation was derived and ensure transparency in the process. Get started on a business appraisal today and schedule a free consultation!
Financial, Economic, and Industry Analyses
Furthermore, a thorough business appraisal includes a detailed financial analysis. If you are buying or selling a business, this could be the most important aspect of a business appraisal. A financial analysis examines key financial metrics, providing insight to help you maximize the value of a business. This includes:
- Revenue trends: How much has the business earned in the past, and what are the projections for future income?
- Profitability: What is the business’s profit margin? Are there opportunities to improve profitability?
- Cash flow: How well does the business manage its cash flow? Is the business generating enough cash to cover its expenses and reinvest in growth?
In addition, valuation experts consider broader economic and industry factors that might affect the value of the business. For example, a business that operates in a rapidly growing industry may be valued higher due to strong growth potential. On the other hand, if the industry is facing regulatory challenges or market saturation, it may be less valuable.
Business appraisers like Peak will account for trends in the broader economy, such as inflation rates, interest rates, and market conditions when valuing a small business.
Conclusion of Value
Finally, a business valuation report provides the conclusion of value. This is the estimated value of the business. A conclusion of value is presented as a range derived from different methods and assumptions used during the valuation process. The conclusion of value is the most crucial part of the report and can help guide any future decisions for business owners. If you are selling, the conclusion of value can help you set a reasonable asking price. If you are buying a business, the conclusion of value can help you feel confident that you are not overpaying.
Conclusion
To conclude, a business appraisal is an essential tool for anyone looking to understand the true value of their company. Learning what a business appraisal includes can prepare you for a professional business appraisal to make better decisions. A business appraisal includes detailed analyses of financial performance, industry trends, and valuation methods, providing a complete picture of a business’s value.
If you are looking to obtain an accurate and reliable business valuation, Peak Business Valuation is here to help. With years of experience, we provide detailed appraisals to help business owners make informed decisions about buying, selling, or growing their businesses. Our team of valuation experts can help you understand the value of your business and guide you through every step of the business valuation process. Reach out today to get started on your business appraisal!
