If you are a business owner, at some point in the future, you will want to know how much your business is worth. Perhaps you are wondering how to calculate the value of your business. Do you need a business valuation, a business appraisal or a broker’s opinion of value? Is there a difference? If so, what is the purpose of each?
What Makes Up a Business?
A business is the combination of the real estate and the going concern. A going concern is the sum of all the intangible assets that make up a business including their name, trademarks, accounts, management skills and such.
Let’s use Piggy’s Ribs as an example. Piggy’s has a little greasy spoon location downtown. They’ve been in business for the last 50 years and the place is packed every weekend. The value of their business is much more than what the property is worth. That run-down building is nearly falling apart. But it’s those awesome ribs and that secret cold slaw recipe that makes them so popular. If Piggy’s ever decided to sell, they would need to get not only a real estate appraisal, but more importantly a business valuation to establish the value of their renowned restaurant.
What is Included in a Business Valuation?
Every business price determination will need to evaluate all of the contributing factors. While appraising the property is pretty straightforward, placing a value on a business includes many items that are less defined and more difficult to individually value.
What is included in a business valuation?
Tangible or fixed assets
Land, buildings, furniture, fixtures and equipment included in a real estate appraisal sometimes included in a real estate appraisal
Intangible assets: franchise rights, licenses, patents & copyrights, contracts and leases, trademarks and company name, workforce, accounts receivable, goodwill, customer loyalty, name recognition, time in business, business systems, marketing and management skill, included in a business valuation.
How are Businesses Valued and Who Values Them?
As long as a business has sustainable cash flow, the value of the business should far outweigh the value of the buildings and equipment. But that still leaves us with the question: what is the difference between a business valuation, business appraisal, and an opinion of value?
What is it? A business valuation determines the value of the business and may include the property.
Who can do it? Technically speaking, anyone can complete a business valuation. In fact, you can even find sites online offering free three-minute business valuations. But the truth is – you get what you pay for. A business valuation is only as good as the one who completes it. People who have the training, skill and experience to complete a business valuation include:
- Certified General Real Estate Appraisers
- Certified Public Accountants (CPA)
- Certified Valuation Analysts (CVA)
What is included? A business valuation will consider at least one of the three main approaches to value:
- Asset approach: The business is valued based on the sum of each of the components. It is also known as the liquidation value.
- Market approach: The business is compared to other similar businesses that have sold.
- Income approach: The business financials are analyzed and compared to market rates of return to determine a business value.
How can it be used? A business valuation can be used in many different ways:
- Establishing a sales price
- Validating a purchase price
- Partnership or shareholder disputes
- Financial planning
- Exit planning
What is it? A business appraisal is a business valuation that has been completed by a licensed professional. In common practice, however, you will find the terms business appraisal and business valuation used interchangeably. The main difference is the competency of the evaluator.
Who can do it? The gold standard in business valuation is the Certified Business Appraisal. This report must be completed by a firm or an appraiser that has been credentialed by a nationally recognized business valuation association such as:
- American Society of Appraisers (ASA)
- American Institute of Certified Public Accountants (AICPA)
- National Association of Certified Valuation Analysts (NACVA)
What is included? A business appraisal will include an analysis of the viability of each of the aforementioned approaches to value. The appraiser will also factor in economic and industry conditions, national valuation standards and other market-related data.
How can it be used? A business appraisal can be used in all of the above situations plus:
- Obtain federally-backed financing including SBA loans
- Partnership or shareholder formation, expansion, or separation
- Divorce and other court proceedings
- Estate planning
BROKER’S OPINION OF VALUE
What is it? A broker’s opinion of value (BOV) is a limited business valuation provided by a licensed real estate broker.
What is included? A broker will compare the business with other similar businesses that are available within their network. They may also examine the financial reports and apply a basic rule-of-thumb market capitalization rate.
Who can do it? A broker’s opinion of value on a business can only be completed by a licensed real estate broker, not a sales associate. Look for a broker that has one or more of these qualifying designations:
- Certified Business Broker (CBB)
- Certified Business Intermediary (CBI)
- Accredited Business Intermediary (ABI)
How can it be used? A BOV can be used by a seller to set a listing price and by a buyer to determine a fair purchase price. An opinion of value, however, cannot be used to obtain bank financing, settle IRS disputes or in any court proceedings.
A business valuation, business appraisal or broker’s business price opinion will each place a value on your business. The evaluator can add up all of the individual components to create an asset value or they can find comparable businesses that sold in the market approach. The most accurate approach, however, is by analyzing the financials and determining a value based on the income approach. Either way, the accuracy of the business valuation will depend on the skill, training and experience of the evaluator. Look for a licensed professional that has received accreditation from a nationally recognised business valuation association.