Know What You’ve Got: The Difference Between a Business Valuation and Appraisal
Some of the most frequently asked questions encountered by our team of Chartered Business Valuators (CBVs) revolve around the difference between a business valuation and appraisal. It’s understandable—the terms sound similar and are frequently used interchangeably outside professional circles. Plus, navigating the complexities of business ownership and management is challenging, which makes discerning the right evaluation method for your business crucial. Let’s explore these two services and shed some light on when and why each should be utilized to best serve your business needs.
What is a valuation?
As we’ve previously explored in our article on the value of business valuations, a business valuation provides a conclusion on the company’s overall value (i.e., the value of the shares). It’s not just about the numbers on your balance sheet but also the intangible elements that contribute to your business’s worth, such as brand name, customer relationships, or goodwill. Valuations are also performed for financial reporting and tax purposes to conform with reporting / regulatory requirements. Whether you’re considering a major decision like a sale, preparing for succession, or are simply curious about your company’s market position, a business valuation will help.
What is an appraisal?
An appraisal provides a detailed analysis of a company’s fixed assets (property, machinery, equipment, etc.) and concludes on their value. This process is essential when you’re looking at the resale value of these assets, considering renovations or upgrades, shopping for insurance, or assessing them for tax purposes. A precise appraisal can provide you with a clear financial picture of each asset, which helps with decision-making related to asset management and investment.
Who might need these services?
- Valuation: Business owners contemplating major changes, like selling their enterprise or purchasing another, seeking additional funding, or succession planning. It’s also crucial for those facing legal situations like disputes or divorce, where the value of the business is a key factor.
- Appraisal: Those needing a detailed assessment of specific tangible assets, like a company with cutting-edge equipment/machinery or a real estate company with a portfolio of properties, will find appraisals valuable. It’s also vital for businesses undergoing restructuring, where the value of each asset needs to be precisely determined.
Choosing what you need
Deciding between a valuation and an appraisal depends on your objectives. If you’re looking at the overall strategic direction and health of your business, or looking to comply with tax regulations and financial reporting requirements, a valuation is the way to go. However, if your focus is on individual assets for reasons like insurance, tax, or asset sale, an appraisal is more appropriate. It’s about the detail and specificity of each asset, ensuring you have the right information for targeted decisions.
Our CBVs are dedicated to providing valuation services and completing reports that contain the actionable insights you need. If you’re considering a major move, your DMCL advisor is here to help you better understand what you have in your business. Remember, the right knowledge can be the catalyst for your business’s growth and success.
Article written by Chris Riccio, CPA, CBV