Business valuation vs business appraisal: what’s the difference?

By Evident Valuations

A business appraisal may help an owner explore a possible selling price. A business valuation may provide a more developed assessment for a defined purpose, date and ownership interest. However, labels alone do not tell you what work has been performed or how the result can be used.

Providers use these terms in different ways. The practical distinction is in the instructions, analysis, evidence, reporting and limits on reliance. Ask to understand those features before choosing an engagement.

What might an appraisal involve?

An appraisal may offer an indicative range based on an initial review, market experience or comparisons with businesses offered for sale. It can be useful early in a sale discussion, when an owner is deciding whether to investigate an exit.

Check what the range represents. An asking price, an agent’s marketing recommendation and a completed transaction price are different things. Advertised prices do not establish what buyers ultimately paid, and the businesses being compared may have different earnings, risks or sale terms.

The Australian Government’s selling a business guide distinguishes informal market comparisons from a formal valuation. That is a useful starting point, rather than a universal definition of every provider’s product.

What should a valuation engagement explain?

A valuation should make clear what is being valued, at what date, for whom and for what purpose. It should explain the selected methods, material information and assumptions, and the limitations on using the conclusion.

For example, a report assessing all the shares in a company needs to distinguish that subject from the operating business alone. Debt, cash, non-operating assets and share rights may matter. Our enterprise value and equity value example shows why the distinction affects the number.

Five questions before you commission either

1. What decision will this support? Describe the actual transaction or other use, rather than requesting a number without context.
2. What will be investigated? Ask which records, business risks and market evidence will be considered, and where the provider will rely on supplied information.
3. How will the conclusion be explained? Understand whether you receive a brief indication, an analytical report or another defined deliverable.
4. Who can rely on it? A document addressed to one party for one purpose should not be assumed suitable for an unrelated user or matter.
5. What relationships affect independence? Discuss relevant conflicts and any connection between the adviser, the parties and the transaction.

A simple example

An owner considering retirement might first explore market interest and an indicative sale range. Later, a co-owner may propose buying the owner’s shares under a shareholders agreement. The second question could require a particular valuation date, basis and appointment process.

The early appraisal could provide context, but it should not automatically be reused as the answer to the share transfer. The governing documents and professional advice need to shape the new scope. This is an illustrative situation, not a statement that every share transfer requires a formal valuation.

Match the work to the intended use

Ask your legal, tax or accounting adviser about assignment-specific requirements where those matters are involved. A professionally prepared report does not guarantee acceptance by a court, regulator, lender or another party, and a valuation does not replace due diligence or negotiation.

For a commercial decision, clarity is more useful than choosing the most impressive label. Read how valuation methods differ, explore transaction valuation support or discuss your intended use with Evident Valuations.

Related reading

• How business valuation methods differ
• When might a shareholder transaction need an independent valuation?

General information only. The appropriate valuation approach and requirements depend on the circumstances, agreed scope and intended use. This article is not a valuation of a particular business or individual legal, tax or financial advice.