Business Valuation vs Business Appraisal

What is the difference between a business valuation and a business appraisal?

The words are used loosely, so start with what each document is for. A business appraisal, usually prepared by a broker or agent, is an opinion of the price the business is likely to achieve if it is put on the market. An independent business valuation is a reasoned opinion of what the business is worth at a stated date for a stated purpose, prepared by someone with no stake in the outcome.

The labels are not reliable. Some documents called valuations are broker opinions, and some appraisals are carefully reasoned. Judge a document by what it contains: the purpose, the date, the reasoning, and who prepared it and why.

The difference matters because the same number can mean different things in different hands. A figure that is a fair starting point for an asking price can be an unsafe basis for a share transfer between co-owners, where one party will test every assumption.

What does a broker or agent appraisal do well?

A good appraisal has real strengths. It is not a lesser document so much as a different one.

• It draws on what the broker has seen sell, and on how many buyers are looking in your industry and area.
• It is usually free or low cost, and quick.
• It gives a practical view of where to pitch an asking price and how long a sale might take.
• It helps you choose an agent, because you can compare how different brokers see the business.

Its limits come from its purpose. An appraisal is often offered in the hope of being appointed to sell, so the person preparing it has an interest in the listing going ahead. That is not dishonesty, and good brokers manage it well, but it is why a third party who must rely on a number usually wants one prepared without that interest.

An appraisal also often sets out a conclusion with limited reasoning. That is enough for a listing. It is not enough for a tax adviser or a lawyer who has to explain how the figure was reached.

Some brokers do provide a written report with comparable sales and a stated method. Where that is the case, the document is closer to a valuation in form, and the three questions further down this guide still apply: purpose and date, interest in the outcome, and who can rely on it.

What does an independent valuation include?

An independent valuation is built to be read and relied on by someone who was not in the room. A good one includes the following.

• The purpose of the valuation and who the report is for.
• The valuation date, because value changes over time.
• The standard of value used, such as market value, and the interest being valued.
• The information relied on, and what was not available.
• The normalisation of earnings, with each adjustment explained.
• The method or methods used, and the reasoning from the evidence to the conclusion.
• Assumptions and limitations.
• A statement of the valuer’s independence and of any interests or relationships.

At Green Standard, a draft report is provided before the report is finalised, so the owner can check the facts. Our page on how we value sets out the approach.

Independence has a practical meaning. The valuer is paid a fixed fee for the work, not a commission on a sale, so no particular outcome pays more than another. Any relationship with a party to the matter is disclosed.

The date matters more than owners expect. A valuation as at 30 June uses the facts known or knowable at 30 June, so a customer lost in September is not part of it, and a valuation prepared today for a past date is built the same way. The purpose matters because it changes the question: the same business can carry different values depending on whether the interest is a controlling or a minority holding, and on what assumptions about a sale suit the use the report will be put to.

How do they compare side by side?

When is an appraisal the right tool?

An appraisal is the right tool when the question is commercial and the audience is you.

• You are thinking about selling and want a feel for the market.
• You are choosing between brokers and want to hear how each would position the business.
• You want an asking price range for a listing and are comfortable that the number is an opinion.
• No third party will need to rely on the figure.

An appraisal also has a place alongside a valuation. Once you know what the business is worth and why, a broker’s view of the market tells you how to position it and how buyers are likely to respond.

When do you need an independent valuation?

You need one when someone other than you has to rely on the number, or when the number has to withstand questions. Typical cases include the following.

• Accountants and tax advisers who need support for a figure used in tax. Our guide on business valuations for CGT explains where market value matters.
• Co-owners and shareholders pricing a transfer or an exit, where each side needs a figure it can accept or test.
• Lawyers advising on shareholder, partnership, family law or commercial matters.
• Lenders who want an independent view of a business offered as security or being acquired.
• Courts and tribunals, where the rules on expert evidence apply and your lawyer will advise on whether and how a valuation can be used.
• Estate and succession planning, where a figure has to be fair to people who may disagree about it.

Where a matter is or may become contested, tell us at the start. The scope, the fee and the form of report depend on it, and your lawyer should advise on how a valuation will be used in proceedings. The dispute and shareholder transfer pages describe how those engagements run.

Two situations catch owners out. One is a shareholder or partner exit agreed informally on a broker’s number, which later has to be defended to a tax adviser or to a co-owner’s lawyer. The other is a lender or an estate that asks for independent support after the price has been set. In both, the independent document is easier to commission before the figure is agreed than after.

Can you use both, and why might they differ?

Yes, and many owners do, at different stages: a valuation 12 to 24 months before a sale to understand and prepare the business, and an appraisal when it is time to list. Our guide on valuing a business before selling it covers the timing.

When the two numbers differ, compare the earnings each is built on before comparing the totals. Some appraisals are expressed on seller’s discretionary earnings, which add the owner’s pay back to profit. A valuation for a buyer who has to employ a manager deducts a market wage for that role first. The multiples differ for the same reason, because they apply to different earnings.

The figures below are illustrative, and the multiples are assumptions chosen to show the arithmetic, not market data.

If you hold both a valuation and an appraisal, ask the broker which earnings and which multiple the appraisal uses, and check whether the owner’s pay, private expenses and one-offs have been treated the same way in both. Much of any gap can often be found there.