A valuation or appraisal of a business provides an estimate of the economic value of a business or an owner’s interest in a business. Business Valuations are used by buyers and sellers to determine the price that one is willing to pay or receive to bring about a sale of a business. In addition to estimating the selling prices, valuation tools are used to resolve disputes related to estate and gift taxation, for divorce litigation, to allocate business purchase price among business assets, to establish a partner’s ownership interest for buy-sell agreements, and for many other business and legal purposes.
The Certified Appraisal is the highest level appraisal and is developed according to Uniform Standards of Professional Appraisal Practice (USPAP). Typically a Certified Appraisal is needed for estate planning, wills and trusts, Employee Stock Option Plans, for litigation or whenever the IRS, other government regulatory bodies or the justice system is involved. The Certified Appraisal is the most rigorous kind of valuation and also the most expensive. It involves detailed forensic analysis and must be carried out by a Certified Appraiser according to USPAP. The resultant product is a comprehensive and defensible report the shows the approaches and methods used, identifies of all assumptions, and presents the results in a well-defined format.
The Opinion of Value is similar to an Appraisal, but the forensic analysis is less rigorous. This kind of valuation does not necessarily meet all of the strict USPAP standards. Nonetheless, the financial and other information are analyzed in depth as well as taking into account the risks and opportunities. The approaches and methods that are used are the same and an Opinion of Value Report should be able to provide the reader with the same kind of information as a Certified Appraisal. While the Opinion of Value is limited in its use (e.g. not for litigation), the resulting report should be just as useful, but at a much lower cost.
The purpose of this kind of valuation is to provide a “ball-park” price range of how much a business might sell for in today’s marketplace. The result is an estimate based on limited data and is not as rigorous, comprehensive or accurate as a Certified Appraisal or Opinion of Value. The Estimate of Value is based on limited variables such as revenues, earnings, performance history and comparisons with other like business in its industry. Rather than rigorous methodology, this valuation uses “rule-of-thumb” estimates. This is the least expensive way to provide internal management with an approximate value of their business.