Evaluation of a business is important, to the buyer as well as to the seller. A way of conducting thorough and well-detailed analysis of a particular business is called business appraisal. It is done to assess the performance of such organization against a given set of criteria or standards.
An appraisal is usually done by a professional, especially when a business is to be sold and the value needs to be determined. It is also used to know the legal obligations of a business.
Types of Business Appraisals
There are different methods an appraiser can employ when appraising a business, depending on what they deem suitable, appropriate and applicable to the business.
This is a common type of appraisal. It is usually done when the business must cease operations or folding up. The appraiser assesses the financial book and determines the value of the business asset. This can be gotten by deducting the business liabilities from its assets.
Capitalization of earnings
This type of appraisal involves assessing the earnings in a business. It is done by looking into all documented earnings and assessed according to their significance or weight. The most recent earnings are considered the most significant.
If appraisal by capitalization of earning is done by looking into historical earnings, appraisal future earnings are conducted by assessing potential earnings of a business. This type of appraisal also gives weight to present earnings.
This method of appraisal is determined by dividing the gain or loss of investments made by the business over a period of time (rate of return) by 100, which is usually 10. This makes 10 the capitalization factor.
Importance of Business Appraisal
Professional evaluation of a business or appraisal is very important. It is essential in some scenarios than others. Such scenarios include:
When you need to buy and sell a business
Professional evaluation or appraisal of a business must be done and completed before a company can be sold, bought or merge with another. This helps to ascertain the accurate value of the business or organizations involved.
Appraisal ensures a buyer doesn’t buy above the right market price and the seller doesn’t sell below the market price.
When legal disputes must be settled
It is common for businesses to be involved in legal disputes. This is often caused by breach in agreement or default in contract terms. When such happens, legal actions are required. Courts that handle such cases always request for a business appraisal. This helps the law to evaluate the business should there be need to re-allocate funds, sell one or all of the businesses involved.
When you need to determine the value of intellectual property
Tangible assets are not the only aspect of a business that can be appraised. Intangible assets can also be appraised, such as intellectual property, patent, and trademarks. Assessing the value of the intellectual property of a business can contribute to the overall value of the business.
When you need business finance
A business appraisal is necessary if you ever want to qualify for business finance. If the value of your appraisal is high, it can attract investors into the business, as well as convince finance vendors.
When you need to determine tax responsibility
Every business is mandated to pay tax. To calculate the monetary value a business is required to pay in tax, the appraisal value of that business is needed. High appraisal value means high tax responsibility.
Disclaimer: All views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. As such, the information contained therein is not intended to be personal legal, investment or tax advice or solicitation to engage in a particular business evaluation process.