Business owners who are in the early stages of deciding whether or not to sell their business, one of the first questions we are asked is – what’s my business worth or can you do a valuation? What is the difference you might ask?

 

There are important distinctions between a market appraisal and a valuation for a business.

 

Most Business Brokers will provide an appraisal of a business, not a valuation, there is a distinct reason for this, and they have quite different meanings and applications.

 

 

• Based on real-world data, market demand, and recent comparable sales

• Size, location, industry, profitability, customer bases, current interest rates, security of income

• Typically appraisals are completed in a shorter timeframe

• More flexible and adaptable to changing market conditions. Sets a realistic sale price

• Reflects actual market sales & demand, much like housing/property comparative sales

• Identifies factors such as the strengths and weaknesses of a business

• Provides a value that a seller might achieve in the market based on the above factors

 

A market appraisal is an estimate of what a business is likely to sell for in the current market, taking into account a range of factors.

 

 

• Suitable for SME’s up to ~$15mil

• Provide a realistic selling price

• Use as a negotiation tool

• As a tool for business owners to understand the value of their business (usually owners looking to sell in the next 1-5 years)

• *Worth noting an appraisal is not a legally binding valuation

 

For most business owners, an appraisal is the appropriate method to understand the value of your business.

 

 

A business valuation, on the other hand, is a more comprehensive and formal assessment of a company's worth.

• Uses theoretical models, detailed financial analysis, and projected cash flows

• Provides a comprehensive value assessment for legal, financial, or regulatory purposes

• Typically takes longer to complete and requires more detailed analysis and reports

• Is less flexible, often based on static financial data at a given point in time

• Generally costs more due to the depth and detail of analysis required

• May be less reflective of actual market conditions during a sale process

• Needs to be able to stand up to scrutiny in court

 

 

• Share sales • Disputes/Marriage breakups

• Acquisitions

• Funding

• High value businesses - M&A transactions

• Use in legal situation or court

 

Market appraisals cannot typically be used for legal purposes in New Zealand.

 

A market appraisal is an estimate provided by a Business Broker to gauge potential selling prices and is often used by sellers to help determine listing prices. It is based on the Business Brokers knowledge of the market and recent comparable sales.

 

A registered valuation, on the other hand, is a professional assessment of a business's market value carried out by a qualified and licensed valuer. This type of valuation is typically required for legal, financial, or regulatory purposes. It's important to note that Business Brokers are real estate agents and are not permitted to use the term "valuation" unless they are also registered valuers.

 

Therefore, while market appraisals are useful for sellers to understand potential selling prices, they are not suitable substitutes for registered valuations when it comes to legal matters. Business valuations often employ specific methodologies such as the Asset Valuation Method, Earning Based/Multiplier Method, or Income Approach.

 

These methods involve detailed analysis of financial statements, assets, liabilities, and future earnings potential. While both approaches aim to determine a company's worth, market appraisals are more focused on providing a realistic sale price in the current market, whereas business valuations offer a more theoretical and comprehensive assessment of value.

 

NZ Business Brokers works with business owners when selling to assist them in working through this important stage before going to the market. Want to find out more or get an appraisal of your business? Call us on 0800 777 731 or email info@nzbusinessbrokers.co.nz