Business Valuation Basics: What’s the Difference Between a Business Valuation and a Market Appraisal?
Assessing all aspects of a business, from tax liability to property assets to brand reputation, can show the company’s true value.
Business valuations and market appraisals are the best ways to determine this value. However, these two evaluation methods have some differences to be aware of.
Business Valuation Vs. Market Appraisal
Business valuations and market appraisals have the same goal: to determine a business’s worth.
Business valuations are more concrete, creating detailed reports concerning the business’s financial performance and potential. All valuations use uniform reports and metrics to determine a company’s worth based on the “big picture” and as many factors as possible. This includes all tangible and intangible assets and liabilities.
Market appraisals try to look at the big picture of a company, just like valuations do. Unlike valuations, appraisals can vary substantially depending on the appraiser. They typically don’t consider as many business factors as valuations do and rely on the appraiser’s opinions and understanding of the market. A market appraisal can include some intangible elements.
The two main differences between a business valuation vs. market appraisal breaks down to this:
- Valuations are sworn and legally binding, while appraisals are not.
- Valuations consider all intangible assets; appraisals focus more on tangible factors.
A great way to understand market appraisals is to consider them a “highly educated guess,” while a business valuation is a more formulaic and comprehensive assessment.
Understanding Business Valuations
The elements that contribute to a business valuation are plentiful and complex. Valuations combine the appraisal of tangible assets with the worth of intangible assets for a factual overview of worth.
When evaluating a business’s worth, the evaluators consider the following factors:
- Brand and Reputation
- Potential
- Patents and Trademarks
- Contracts
- Accounts Receivable
- Client and Supplier Lists
- Key Employees
- Assets
- Market Trends
- Growth Projections
- Capital Structure
- Business Strategies
- Location
- Traffic and Popularity
This is not an exhaustive list. The company’s intangible assets and elements can vary greatly depending on its industry and structure. A business valuation considers a business’s past, present, and future, creating an in-depth and predictive overview.
Understanding Market Appraisals
Market appraisals are often simpler than business valuations. They focus on a company’s concrete economic value and may consider some intangible factors, but not to the same degree as valuations.
An appraisal typically includes at least the following considerations:
- Loans
- Assets
- Intellectual Property
- Liabilities
- Net Profit
- Patents and Trademarks
- Website Traffic
- Leasing Terms
- Market Competition
Since appraisals have a more fluid definition, what intangible elements will and will not be considered is in the hands of the appraiser. However, this information is still useful when making decisions and gauging a business’s general worth.
When to Use a Business Valuation
As mentioned, both valuations and appraisals are valuable. Each has pros and cons, so knowing the appropriate times to use each is helpful. Below are common reasons for seeking a business valuation:
- Legal Purposes: Valuations are almost always more legally binding than appraisals. They’re used for many legal purposes, some of which we’ll elaborate on below.
- Tax Purposes: A business valuation can help a company ensure it pays its taxes properly. It can become a necessity during an IRS audit or other tax issue.
- Financing or Investment: When trying to secure financing, take on new investors, or other financial moves, a business valuation can help a company present its value. It’s a more reliable indication of potential than an appraisal.
- Estate Proceedings: If the owner of a company dies, a business valuation is typically part of the estate settlement. The precise worth of the business is required to divide up the estate properly for beneficiaries.
- Divorce Settlements: Like estate settlements, divorce settlements require concrete information on a business’s value. The court needs a clear value to divide up assets correctly during a divorce.
- Mergers and Acquisitions: Valuations are often used during mergers and acquisitions. It allows purchasers to know the worth of their acquisition, sellers to negotiate their price, and mergers to understand where valuable assets lie within the new company structure.
- Any Ownership Change or Discussions: Similar to mergers and acquisitions, ownership changes often need a valuation. Whether a partner joins, leaves, dies, or reassigns ownership percentages, they must know the business value. With this information, owners can negotiate buy-out terms, buy-in terms, and share divisions.
- Shareholder Changes or Disagreements: Along with partnership changes, shareholder changes benefit from a clear valuation. A valuation report is useful during shareholder disagreements, proving the company’s worth.
- Strategic Planning: Aside from settlements, taxes, and legal issues, valuations also come in handy when an owner wants to plan thoughtfully for the future. Having a full understanding of your company’s value and assets can make business decisions easier and show the path toward growth and progress.
When to Use a Market Appraisal
It’s worth noting that a business valuation can always stand in for a market appraisal, but not vice versa. An appraisal does not hold the weight and officiality of a valuation. Therefore, it doesn’t stand up as well in court or concerning taxes. Nevertheless, it can be useful for the following purposes:
- General Insight: When a business owner wants a general understanding of their company’s worth and assets, a market appraisal is a brilliant way to gain insight.
- Financing or Investment: Depending on the type of financing and investors a company seeks, an appraisal may be enough. Valuations hold more weight, but an appraisal offers a satisfactory overview of the company’s worth for some investors.
- Mergers and Acquisitions: Like with investing and financing, an appraisal can be a sufficient overview of worth during a merger or acquisition.
- Asset Disposal: When selling or scrapping certain assets, an appraisal can show asset depreciation, potential, and more. When owners want to rid the company of certain assets, an asset appraisal helps them make wise decisions.
- Insurance Claims: While a valuation is certainly useful when making insurance claims, a market appraisal is typically enough to file an accurate claim.
- Collateral: If you put your company up as collateral for a loan or financed purchase, you need to indicate the worth of the business. Since valuations are expensive and comprehensive, an appraisal is a more convenient way to determine its worth as collateral.
- Strategic Planning: As mentioned, business valuations are excellent for strategic planning, but appraisals can be, too.
Final Thoughts on Business Valuation vs. Market Appraisal
A lack of understanding concerning a company’s value, assets, and liabilities can lead to poor business decisions. As a business grows, shrinks, and generally changes over time, the value changes. To stay aware and involved, business owners can get a business valuation or market appraisal every so often.
Knowing which one to get and when to do so can be challenging. A knowledgeable business coach can guide you toward the most beneficial option and help you use the valuation or appraisal to your advantage.
For help navigating business valuations and market appraisals in a variety of situations, contact Lori Moen at Catalyst Group ECR!
