Business Valuation vs. Business Appraisal

Why do we use the terms "appraisals" and "valuations" to seemingly refer to the same report? While financial professionals use these terms interchangeably, there are differences. Physical assets are appraised while intangible assets are valued. A business appraisal is referred to as a valuation.

Differences Explained

The Business Valuation

Thus Business Valuations include both tangible and intangible value. Additionally, regarding Going Concerns, the value of their intangible assets (generally speaking) far outweighs the value of their tangible assets unless the business is insolvent, bordering on insolvency or is a holding company. In contrast, physical or tangible assets such as equipment, fixtures, furniture, jewelry, real estate, and other physical assets are appraised rather than valued.

The Asset Appraisal

When it comes to valuing businesses quite often some of the tangible assets may need to be appraised as part of a business valuation. Additionally, such tangible assets may need to be appraised for compliance with bank SBA regulations and for other purposes such as acquisitions, bankruptcy, divorce, partnership dissolutions, etc. when there is no intangible value or goodwill in a business or when there is no business at all.

Tangible vs.Intangible Value

Ongoing businesses, know able, branding, contracts receivable, customer deposits, customer lists, key employees, patents, recipes, special knowledge, trademarks, unique company name and reputation, and goodwill in general. Tangible value includes all physical assets.

Valuation Components and Uses


Cash Flow Analysis • Company Background, History and Longevity • Debt Capacity • Future Economic Outlook • Future Industry Outlook • Industry Ratios • Intangible Asset Value • Market Comparables • Tangible Asset Value


Acquisition • Bankruptcy • Buy/Sell Agreements • Employee Stock Ownership Plans (ESOP) • Estate Planning • Foreclosures • Franchise Valuations • Insurance Reviews • Intra-Family Transfers • Litigation, Arbitration & Settlement Support • Loan Collateral Analysis • Mergers • Negotiations • Private Sale • Shareholder Disputes

How Value is Determined

All valuation reports, generally speaking, use the following processes to determine the value of any given business. They are Standard of Value, Premise of Value, and Approaches to Value.

Standard of Value

There are three Standards of Value used to value a business.

1. Fair Market Value

In the United States the most widely recognized and accepted Standard of Value is termed Fair Market Value (FMV) and it is defined as "The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts."* It is the standard used in all Federal tax matters, whether it is gift taxes, estate taxes, income taxes, or inheritance taxes.

Additionally, in true Fair Market Value discounts and premiums are considered, such as DLOM-Discount for Lack of Marketability, DLOC-Discount for Lack of Control and other discounts and premiums. These discounts are most relevant to valuations for IRS purposes and generally are not allowed by courts in cases of divorce, partnership dissolutions or intra-family issues.

2. Fair Value & Divorce Value

Fair Value can have several meanings, depending on the purpose of the valuation. In most states, Fair Value is the statutory Standard of Value applicable in cases of dissenting stockholders' valuation rights. In these states, if a corporation merges, sells out, or takes certain other major actions, and the owner of a minority interest believes that he is being forced to receive less than adequate consideration for his stock, he has the right to have his shares appraised and to receive fair value in cash. It is also used for divorce cases sometimes with some modifications.

3. Strategic/Investment Value

Strategic or Investment Value is the value to a particular investor based on individual investment requirements and expectations. In the U.S. and U.K., it is equal to "Market Value" for the investor who has the capacity to put the property to good use: in its "Highest, Best and Most Valuable Use". For other investors with limited capacity or vision, Investment Value is lower because they cannot put the property to use in a way that is maximally productive. Nevertheless, this is the standard used by both potential investors and sellers to determine a selling price.

Strategic value is the value in the hands of a strategic buyer and may be higher than Investment value due to synergies available to a strategic investor who may be willing to pay considerably more than investment value for their strategic reasons.

* International Glossary of Business Valuation Terms - NACVA

Premise of Value

Once the Standard of Value is determined, the Premise of Value is selected. There are four options.

Book Value

"With respect to a business enterprise, Book Value is the difference between total assets (net of accumulated depreciation, depletion, and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder's Equity). With respect to a specific asset, Book Value is the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise."* Book Value is synonymous with Shareholder's Equity, Net Worth, and Net Book Value. It is essentially the difference between the total Book Value of a company's assets and the total Book Value of its Liabilities.

Going Concern

"The value of a business enterprise that is expected to continue to operate into the future is known as a Going-Concern. The intangible elements of Going-Concern Value result from factors such as having a trained workforce, an operational plant, and the necessary licenses, systems and procedures in place."* A trained and assembled workforce is an example of a Going-Concern. It is a valuable intangible asset for many businesses because of the substantial costs involved with developing a new workforce.

Liquidation Value

Liquidation Value is the net amount or value of the company's physical assets that would be realized if the business is terminated and the assets are sold piecemeal. These physical assets include the equipment fixtures, inventory, machinery, real estate, and vehicles that a company owns. Intangible assets are not included in a company's Liquidation Value. Intangible assets include a business's intellectual property, goodwill, and name & brand recognition. Liquidation Value is typically lower than Fair Market Value. Liquidation Value may be either the result of a forced liquidation or an orderly liquidation.

Replacement Value

Also known as Replacement Cost, Replacement Value is the current cost to replace an asset of a company being valued with a new one of similar or equal value. The Replacement Cost of company assets could be used to determine the value for building equipment, fixtures, furniture, machinery, vehicles, etc. This cost can change depending on changes in Market Value. Replacement Value is also referred to as the price that will have to be paid to replace an existing asset with a similar asset. Replacement Cost Insurance can be purchased to protect and cover a company or individual from this type of cost.

* International Glossary of Business Valuation Terms - NACVA

Approaches to Value

The last step in the valuation process is to determine the approach that will be used and then the method(s) under each approach that are applicable. Commonly used methods are grouped under three general approaches.

Asset/Cost-Based Approach

The asset-based approach is defined as "a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities."* Any asset-based approach involves an analysis of the economic worth of a company's assets in excess of its outstanding liabilities.

Income Approach

The income approach is defined as, "A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount."* This method is the most utilized method by analysts for "Going Concerns".

Market Approach

The idea behind the "Market Approach" is that the value of a business can be determined by reference to reasonably comparable guideline companies ("Comps") for which transaction values are known. The values may be known because these companies are publicly traded or because they were recently sold and the terms of the transaction were disclosed. For a business valuation professional, a good set of comps may be as few as two or three – and sometimes no comparable company data can be found. The objective of analyzing these comparable sold companies is to determine if the comparable company has a similar risk profile to the subject company. There are three sources of comparable company transaction data: Public Company Transactions, Private Company Transactions, and Prior Transactions of the Subject Company

* International Glossary of Business Valuation Terms - NACVA

What to Expect

Here's what to expect when hiring National Business Appraisers to value your business.

Call or email us for a free consultation.

Request a bid by submitting the form by email or fax.

Engagement letter is signed by both parties.

Refer to document checklist for items needed.

Fill out the questionnaire and return it by email or fax.

Submit requested documents with a 50% fee agreed upon by both parties.

Site visit and observation of the business and its assets is performed along with interviewing the owner or president and key personnel.

Relevant economic information is sought.

Relevant industry information and ratios are sought.

Company ratios are developed.

Company ratios are compared to the industry ratios.

Ratios are analyzed.

Assets and liabilities are adjusted to their fair market values.

Normalizing and control adjustments are made.

Cost approach is completed utilizing the appropriate methods for the circumstances.

Future cash flows are determined.

The long term growth rate for the nation and business are determined and compared.

Market comparables are sought.

Market approach is completed utilizing the appropriate methods for the circumstances.

Risk assumptions and premiums are developed.

Income approach is completed utilizing the appropriate methods for the circumstances.

The results from the methods utilized under the three approaches are reconciled to determine a conclusion of value.

Valuation analysis and report prep begin.

Client reviews report draft for the correctness of facts.

Final valuation report is completed.

Final payment is tendered.

Final valuation report is delivered to the client in an exit conference or by mail.

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