Let’s talk about Business (E)Valuations. Three terms are frequently used almost interchangeably, but they each have a distinct meanings. Then I will share a fourth term that I invented that I think syntheses the best of all three. The terms are (1) Business Valuation, (2) Business Evaluation and (3) Business Appraisals. These terms overlap so let’s try to clarify.
Valuation is basically, the arriving at a Value.
Evaluation is basically evaluating, examining, understanding and reporting.
Both terms are needed for the third: Appraisal. A Business Appraisal lists and examines the assets of a business. It involves Evaluation and Valuation. That is because the total “value” of the business is greater than the sum of its machinery and equipment. And at the conclusion of a true Business Appraisal, you have a written report that is compliant with USPAP. USPAP stands for Uniform Standards of Professional Appraisal Practice. These Uniform Standards of Professional Appraisal Practice were promulgated by Congress and are accepted around the world.
Now for the fourth term we created that synthesizes these three terms: the Eval-Appraisal.(TM) An Eval-Appraisal is not a real estate appraisal, that takes a state license and varies in all 50 states. An Eval-Appraisal is a Business Valuation. The purpose is to arrive at a third-party Value. This is important if you are buying or selling a business and doubly important if you are trying to borrow money! The Eval-Appraisal starts with the appraisal of the physical assets, but then it goes on to include intangibles. Things like “how long you have been in business” and “loyal customer base”. So this includes examining, understanding, i.e. evaluation. . NOTE: If a business owns real estate, a separate real estate appraisal will be needed from an outside source and that result can then be reported to and merged into the Eval-Appraisal.
The Eval-Appraisal may be ordered to establish a Purchase Price or On-Going Fair Market Value or even a Liquidation Value.
If you are using a Business broker, you should insist on your own independent report, measuring many different areas, in short an Eval-Appraisal.