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Business Valuation

business valuation Report / Business Appraisal Report. Business Evaluation report. Certified Business Appraisal

What is a business valuation?

Business Valuation Business Valuation
Business Valuation Business Valuation

A business valuation, also known as a business appraisal or business evaluation, is a process and a set of procedures used to arrive at an opinion or a conclusion regarding the estimated value of an ownership interest in a business entity as of a given point in time. A business valuation report/business appraisal report/business evaluation report is often necessary in buying a business, selling a business or other key business transactions.

The elements of factual data, common sense, informed judgment, completeness, adequacy, relevance, appropriateness, and reasonableness all work together in formulating the opinion of value.

To be a credible business valuation or an appraisal, the appraisal must be in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP). The Uniform Standards of Professional Appraisal Practice were created by the Appraisal Foundation’s Appraisal Standards Board (ASB). The ASB develops, interprets and amends USPAP on behalf of appraisers and users of appraisal services. It became effective April 27, 1987. Recognized accreditation of appraisers normally meeting the requirements of USPAP are the following: ASA, CBA, ABV and CVA. These designations are granted by the following organizations: ASA-the American Society of Appraisers, CBA-Institute of Business Appraisers, ABV-must be a CPA and is issued by the American Institute of Certified Public Accountants, and CVA-must be a CPA and is issued by the National Association of Certified Valuation Analysts. Most of these appraisal designations require substantial experience and education. Business valuation reports that are USPAP compliant must be certified by the qualified appraiser that, among other things, there are no conflicts of, or a personal interest in, the business being appraised, that the engagement and compensation is not contingent upon delivering a specific value or result, that the analysis was in compliance with USPAP, and the appraisal must be signed by the appraiser. Desktop reports, limited reports and broker opinions of value reports are not business valuations.

What are the uses of a business valuation?

For ownership changes in a business, examples for the use of a business valuation include:

Other uses of a business valuation include:

The business value identified in a business valuation is used by sellers and buyers to determine the price they are willing to pay or receive to consummate a sale of a business. The value a seller perceives exists for a business is often skewed by the years of blood, sweat and tears which have been poured into the business. The value a buyer perceives exists for a business is often affected by the level of fixed assets and or real estate held by a business. Additionally, the value perceptions of both sellers and buyers get adjusted by what other people say or what they hear in the news.

Consistent or sustained cash flow and earnings, revenue level, services delivered, products sold or produced, fixed assets, owned real estate, industry, customer mix and concentration, suppliers, economic outlook, competition, location, financing, workforce, etc. are just some of the variables considered as a part of the information used to determine the value of a business.

Why is it important to have independent, third-party appraisals?

A certified business appraisal from an outside, independent, knowledgeable, third-party appraiser eliminates the perception of a potential conflict of interest. Additionally, most buyers know, or at least suspect, that sellers overprice their businesses. Buyers likewise believe that the business will be probably be overpriced if the seller’s broker and/or CPA has priced the business. Additionally, if a business broker values a business, he/she is just inviting another potential liability if the transaction later winds up in a dispute. Business brokers, who are not qualified appraisers, usually find it difficult to defend their work to an opposing counsel in a court of law. Finally, the most important reason to have a credible outside appraisal completed on a business is to set both sellers’ and buyers’ expectations. The International Business Brokers Association (IBBA) reports that over 75% of all listed businesses never sell. We suspect that the main reason for such a huge failure rate is that the sellers and/or buyers have unrealistic pricing and deal terms expectations. Experienced “pro” business brokers know that it is better to leave the business valuations to qualified business appraisers.    

Are price and value the same?

Myths about business valuation are extensive. A key myth is the erroneous believe that price and value are the same.

The price at which a business is sold is the result of negotiation and “deal-making” between a seller and buyer. These negations involve variables such as personalities, chemistries, motives and bargaining power resulting in an agreed price.

On the other hand, without a real buyer and seller, the value of a business will be hypothetical. Although a value can be determined analytically, it will vary depending on the purpose and function of the appraisal.

Does the ICBC provide business valuation services?

The ICBC does not provide business valuation services itself; However, The ICBC does count many business valuation professionals among its members. The ICBC also offers business valuation training opportunities for its members.

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