What Do Typical Business Appraisals Involve

1. What Do Typical Business Appraisals Involve Business valuation becomes necessary for various reasons. You may need it to buy another business, or sell your own. Companies need them for tax reporting, i.e. 409A valuations, gifts, and estate tax purposes, and charitable donations. It is used during partnership dissolution, when making intellectual property claims, establishing ESOP, when taking the company public, and for litigation purposes (marital disputes, filing bankruptcy, etc.). While business appraisals help to set a benchmark price, there are several factors that affect valuation. For example, an owner may value his business far more than the investor, who is only concerned with the company’s historic income. It also relies on the economic conditions in the market, and the circumstances under which valuation is conducted. To ensure that the process is uniform, there are a few key factors that are considered. They include: Due Diligence: Appraisers carefully evaluate the condition of the company’s assets- fixed and otherwise. This includes checking assets such as furniture, building, equipment, etc. They examine the condition of each of these assets and estimate repair and replacement costs. Legal documents such as business contracts, licenses, leases, pending litigation, are also evaluated. Financial documents such as tax returns, financial statements, etc. are scrutinized. The reputation of the business in the media and among peers is also subject to scrutiny. Industry-wide Analysis: Future prospects of a company largely depend on the structure of the industry it belongs. Companies in the competitive industry have tight profit margins. Such companies struggle to raise or set prices for products/services. But companies that have a long history of achieving sales target are valued favorably. Choosing the Correct Methodology: There’s more than one method to help valuation of a business. The three most important methods include, asset approach, the market approach, and the income approach. The asset approach begins by valuing the assets and liabilities of a business- the difference between the two is the actual business value. The market approach involves looking around within the market to determine selling price of similar businesses, i.e. if you are planning to buy a business, you will look around to know the market price of companies in similar business. The third approach involves income approach- future economic benefits of investing in the company are considered. Of course, business value isn’t always the selling price, because there are several factors that determine the selling price. For one, a business keen on outweighing an upcoming competitor is likely to pay more than the business valuation. But they play an important role in determining the sale value.