A business appraisal is a process that determines an independent market value for a business in order to set a fair price when it is sold. Business appraisal companies assess all of the assets of a business, both tangible and intangible, using different techniques for to arrive at a fair market value. Business owners may require an appraisal for a variety of reasons: to prepare it for a sale, when issuing shares during an initial public offering (IPO) or for other reasons (such as when insuring it, for example).
Regardless of the type of business, an appraiser must use unbiased methods to provide a fair valuation and must operate independently of any interested parties. They determine the value of a business’ assets using financial analysis, inspection of physical assets and industry comparisons. There are several methods that an appraiser uses to value a business:
Fair Market Value Method
In this method the appraiser determines the value of a business’ physical assets when it is still operating. This can include land, buildings, work equipment, office furniture and fixtures and intangible assets (such as brand value and customer goodwill). Fair market value is determined by the price that the physical items of the business would fetch in an open market (assuming a willing buyer and seller).
Liquidation Value Method
This technique is used when a business has ceased trading and its assets must be sold quickly too meet outstanding debts. This is usually only done for distressed businesses in drastic circumstances because the necessity of a quick sale means the business owner will only receive the minimum value for any assets.
Capitalization of Earnings Value Method
In this case a company that is still operating is valued based on its projected future earnings. By examining how much a business earned in the past the appraiser determines what can be expected in the future making certain assumptions about whether earnings will increase or decrease.
Business appraisal companies use a combination of techniques to arrive at the fair value for a business and are used when a business is being bought or sold, a partner in an ongoing business wishes to leave a partnership and wishes to be paid out, because of business disputes that require a financial resolution, because a business liable for damages or suffered a disastrous event or when it has gone bankrupt among many other reasons. Aside from such events, a business owner can also have a business appraised at any time simply to know how much it is worth.