Understanding Business Valuation and Business Appraisal
Most people often use the terms business valuation and business appraisal interchangeably. However, it’s crucial to understand that these two terms, though similar, have slight differences in their meanings and applications. While both processes essentially estimate the economic value of a company, their processes and circumstances of use differ. In this article, we’ll delve deeper into the differences, similarities and unique aspects of business valuation and business appraisal.
Defining Business Valuation
Business valuation is the process of determining a business’s economic value. The valuation process typically involves a set of procedures used to evaluate the value of the shareholder’s interest in a business. It is a broader concept that encompasses several methodologies and approaches, including financial analysis, industry comparison, and market capitalisation.
Business valuation is often an integral part of business transactions such as buy/sell agreements, merger and acquisition transactions, and in raising capital. It also has other applications in strategic planning, litigation support, and in resolving disputes.
Defining Business Appraisal
Business appraisal, on the other hand, can be considered a more in-depth type of business valuation. It is a comprehensive analysis of a business’s worth, carried out by a qualified professional appraiser. The appraisal report typically includes a detailed explanation of the business’s worth, based on accurate and supportable data.
A business appraisal tends to be more detailed, and stringent guidelines are followed in preparing the report. This thoroughness is crucial for legal and taxation purposes, ensuring that the appraisal can withstand scrutiny.
The Differences: Business Valuation vs. Business Appraisal
While the end goal of both processes is to estimate a business’s value, there are notable differences between a business valuation and a business appraisal.
The main difference lies in the level of analysis carried out. A business valuation generally provides a broader range of values for a business, often given as a value range depending on several factors. It tends to be less formal than a business appraisal and may not require the services of a professionally qualified appraiser.
A business appraisal, meanwhile, offers a clear, specific value, often given as a single number rather than a range. It involves a more detailed and thorough analysis of the business and its underlying assets. Because appraisals are used in official proceedings like courts, the appraisers must conform to stringent guidelines and standards such as those of the American Society of Appraisers.
When to Use Business Valuation or Business Appraisal
The use of business valuation or business appraisal often depends on the context and requirements of the valuation.
Business valuations are useful in strategic planning, helping business owners understand their firm’s value in comparison to competitors. It’s ideal for non-litigious situations such as internal strategic planning, preliminary merger and acquisition valuations, and to provide an understanding of the business’s worth when selling or adding partners.
Business appraisals, however, are necessary for situations that require a level of formality and standardised reporting. These could include tax reporting (particularly for gifting and estate planning), business litigation, divorce settlements involving business assets, and when raising high levels of capital.
In Conclusion
Whether you need a business valuation or a business appraisal will depend on the specific circumstances and requirements of your situation. Understanding the difference between these two terms will help you choose the most suitable process for your needs.
Both offer crucial insights into your business’s worth and stand as effective tools in strategic planning and informed decision-making. Ultimately, whether through business valuation or business appraisal, gaining in-depth knowledge of a company’s economic value is crucial for any successful business operation.
For further reading and a more academic approach on the differences between valuation and appraisal, you may check out this Google Scholar link.