Business appraisals are a form of economic analysis involving the conduction of business valuation to determine the value of the business, professional practice, or specific business assets. These are critical tools for business owners and should be followed from the first day that the business concept begins all the way to the very end of the business life cycle.
Reasons for Business Appraisal:
- Your business is in the initial start -up phase and you must know the value of the business in order to know how much of it you will have to exchange for seed money with your investors
- In the case that you have an established business and you have to give quarterly and annual updates to investors and other stakeholders, a valuation of your business will be able to give you an accurate picture of the financial state of the business. This will give them an indication of how much their current investment is worth
- You may discover that you have opportunities to sell or merge your business at an instant. When this happens, you must have up to date business appraisals to take advantage of these opportunities
- In the case that you want to take on a new business partner, you must know the value of your business to determine what the buy-in price is
- With the availability of different fundraising options available especially to small business owners, you must know the value of the company before you begin to fundraise
- In the case that you want to expand your business by building new facilities, you can take your business appraisal to the bank. The bank will then decide whether or not to lend you the money.
- To decide what the annual per share value of the Employee Stock Ownership Plan (ESOP) is. This is used when the business owner wants to share ownership of the company with the employees
- You must also know business appraisal so as to plan gift taxes such as transferring interest to family members, donation to charities, transfer to intentionally defective grantor’s trust, etc.
- Business appraisals are important especially for litigation support purposes. This can be in regard to economic damages in the business, lost profits, to uncover fraud, or to what the value of a shareholder is in case of a dispute
- Business appraisals also help to decide whether a business is growing, declining, or just stable in value and whether the business needs to be restructured
Business Appraisal Techniques
- Asset Approach: this approach analyses the assets of the business to determine their value. This is especially helpful in the case that the business is closed down and being liquidated
- Income Approach: this approach focuses on the main objective of the business which is to generate income throughout its life cycle/ this approach examines in detail the different ways in which income comes in and expenditures happen. Future projections of income and expenditure are also taken into account here.
- Market Approach: this final approach treats the business as though it is an object available in the marketplace for buying and selling. This process depends on discovering extremely similar or close approximations of the business that were recently sold in the same industry.
This list is not exhaustive and there are several other reasons that make business appraisals a necessity. A business appraisal that is certified is a complex financial analysis that must be done only by qualified professionals who are well trained.