Whether you are valuing a business by yourself or engage a professional business appraiser, a business appraisal report is a typical work product you get.
Such a report does more than summarize the business valuation results – it clearly defines what business ownership interests are being valued. Importantly, it also shows the key assumptions and judgement calls made by the business appraiser.
Now, as a busy business person you may be tempted just to glance at the business valuation result, decide if it is reasonable, then file the report.
Nothing wrong with that, but there is more to be gained from a well-prepared business appraisal report. If you plan to share your business appraisal with others, it is likely they will have questions about your conclusions. On occasion, they may even challenge your business valuation results.
The reasons any business appraisal can be questioned
Business appraisal deals with the business’s future economic prospects. This necessarily requires that you make a number of assumptions. And these assumptions mean that you, or the business valuation expert you hire, make educated judgement calls in order to reach the business value conclusion.
Needless to say, the reader of your business appraisal report may disagree with some of the assumptions contained in the report.
- Are the business sale comparables really comparative to your business?
- How realistic is your projection of the future business income?
- Have all the elements been considered when assessing the company risk?
- Why were these business valuation methods, and not others, chosen to calculate business value?
Typical business appraisal accuracy
Even the most thorough business appraisal will depend for its accuracy on some “leaps of faith” that will affect the final business valuation outcome. So two equally skilled business appraisers will likely come up with different valuation results.
How different? It is not unusual to see a difference of around 20% – 25% between professionally done business appraisals of the same company. In fact, an increasingly common practice in business appraisals is to report the result as a range of business values.
Business appraisal results are useful – if you can defend your assumptions
So if you meet with a healthy dose of skepticism when sharing your business appraisal results with others, you will appreciate why your business appraisal report contains more than just a number.
To use your business appraisal results effectively, spend a bit of time to understand and be prepared to defend the assumptions that drive your business value conclusions.