When discussing the concepts of business valuation vs. appraisal, the terms are commonly used interchangeably. However, they actually refer to two different processes with distinct purposes and methodologies. Let’s dive into what sets them apart.
Valuation vs. Appraisal: Two Main Distinctions
1. Physical Assets vs. Intangible Assets
Appraisal of Physical Assets: Physical assets like machinery, real estate, and inventory are usually appraised. The appraisal is conducted by assessing the market value based on current condition, comparable sales, replacement costs, and other tangible factors.
Valuation of Intangible Assets: Intangible assets such as patents, trademarks, customer lists, and even company reputation fall under valuation. These are typically more challenging to quantify but often contribute significantly to a company’s worth.
2. Legal Standing
Appraisal: An appraisal generally serves as a pricing guide or a benchmark and often lacks legal standing. It is primarily used for internal planning or negotiations.
Valuation: A valuation offers a definitive value and is frequently used in legal matters such as divorce settlements, estate planning, or legal disputes. Valuations must often follow specific guidelines and standards.
Components of a Thorough Business Valuation
A more accurate understanding of the terms “business valuation vs. appraisal” distinguishes that an appraisal is part of a thorough business valuation because a comprehensive business valuation includes both the tangible and intangible aspects of a company. Here’s a closer look:
1. Appraisal of Tangible Assets
The business’s tangible assets, such as inventory and equipment, can be appraised like any tangible property (like vehicles or real estate) based on concrete comparisons. This sets a solid foundation for the valuation process.
2. Valuation of Intangible Assets
Intangible assets include a number of things like branding, patents and trademarks, contracts, accounts receivable, customer lists, key employees, and company reputation. Assigning value to intangible assets can be quite complicated. With this in mind and considering that the value of a business’s intangible assets normally far outweighs the tangible (unless the company is insolvent), it is wise to engage the services of an experienced business broker in the valuation process.
3. Combining Both Values
By calculating and adding the tangible and intangible values, a well-rounded picture of the total market value of the business is obtained. This is essential for accurate pricing and negotiations. We often refer to this as “the art and science of business valuation,” and it takes a great deal of experience to master it. (You can read more about that in this blog post.)
When to Seek Professional Assistance
While a business appraisal can serve as an informal estimate or a guide on price, a formal business valuation is required for lending institutions, property settlements, and estate proceedings.
Selling a Business
If you plan to sell, a formal business valuation can make the process smoother and help you realize the true value of your company. If you are selling a business, we recommend obtaining a formal valuation that can stand up to extreme scrutiny.
In situations involving legal matters, a formal valuation is typically necessary, providing a robust and defensible figure.
Understanding the worth of your business, including both tangible and intangible assets, can provide valuable insights for long-term planning and growth strategies.
Our business brokers are seasoned experts with decades of experience in both business valuations and appraisals. We can:
Avoid Common Mistakes
Navigating the nuances of valuation and appraisal can be tricky. We’ll steer you clear of common pitfalls.
Provide Actionable Insights
With our in-depth understanding, we’ll offer advice to maximize the value of your business.
Guide Sales & Transition
Should you decide to sell, we can manage the entire process, ensuring a seamless transition.
Understanding the distinction between a business valuation vs. appraisal is crucial, whether you’re planning to sell your business, involved in legal proceedings, or aiming to grasp the full value of your company. Engaging professionals with extensive experience in both areas ensures that all assets are considered, leading to an accurate and fair determination of value.
For a no-cost consultation to explore how we can assist you, contact us today.