So you're looking to sell your business and want to know how much that business valuation is going to cost you. As an entrepreneur, you know that every dollar counts, especially when it comes to paying for professional services. The truth is, there's no set formula for determining the exact cost of a business appraisal. It could be anywhere from a few thousand bucks to well over $20,000 depending on the specifics of your business.
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Defining business valuation and appraisals
A business valuation, also known as an appraisal, helps determine how much your company is worth. To calculate your business valuation, an appraiser will evaluate several factors like your financial records, growth potential, and industry benchmarks.
The cost of an appraisal depends on the size and complexity of your business. For small companies, an appraisal typically ranges from $5,000 to $10,000. Mid-sized businesses usually pay $10,000 to $15,000, while large corporations can expect to pay $15,000 or more.
Appraisers use three main approaches:
The income approach evaluates your company’s ability to generate future income and cash flow. It considers revenue, expenses, and net profit.
The market approach compares your business to recent sales of similar companies. It uses industry multiples like revenue or EBITDA to determine your company’s value.
The asset approach sums the value of your tangible and intangible assets like equipment, real estate, and intellectual property. This approach usually represents the minimum value of your business.
An experienced appraiser will apply multiple approaches to calculate a well-supported valuation range for your company. They can also advise you on increasing your company’s value before selling.
A professional business valuation provides an objective analysis of your company’s current market value. It gives you the insights and confidence to make strategic decisions about buying, selling, or investing in your business.
Factors That Impact Appraisal Costs
A business valuation, also known as a business appraisal, can vary widely in cost depending on several factors. The main things that determine how much you'll pay for an appraisal include:
Size and Complexity
The larger and more complex your business is, the more time and effort required by the appraiser. This means higher fees. An appraisal for a small local shop will cost much less than one for a multi-location manufacturer.
Capital Structure
If your business has complex assets, liabilities, or capital structures like multiple classes of stock, the appraisal will take more work. The appraiser has to evaluate things like preferred shares, warrants, options, convertible debt, and other financial instruments. This added effort is reflected in the total cost.
Regulatory requirements
Certain industries like financial services, healthcare, and utilities face more stringent regulations. Appraising a business in these sectors requires specialized knowledge and expertise, so fees tend to be on the higher end of the range.
Valuation approaches used
Most appraisers use a combination of approaches like the income approach, market approach, and asset approach. The income approach, which analyzes your business's earning potential, typically has the highest cost due to its complexity. The market approach, comparing your company to recent sales of similar businesses, is usually the most affordable.
As you can see, the total cost of a business appraisal depends on many factors. But a good appraisal can be well worth the investment, providing an objective, comprehensive valuation of your company. Work with an experienced broker to find a qualified appraiser, and make sure you understand all fees upfront before engaging their services.
Appraisers will consider three main approaches to determine your business’s valuation:
The income approach
The income approach focuses on your business’s ability to generate income. Appraisers will review your financial statements and tax returns to determine cash flow, revenue, and earnings. They’ll use this information to calculate the net present value of your future income streams. This helps determine what a buyer would be willing to pay today for the right to those future income streams.
The market approach
The market approach compares your business to recent sales of comparable businesses. The appraiser will review the selling price of similar businesses in your industry and location that have sold recently. They’ll make adjustments for differences in your cash flow, revenues, location, and other factors. This helps determine a fair asking price for your business based on the current market.
The asset approach
The asset approach determines your business’s value based on the assets it owns, like equipment, real estate, inventory, and intellectual property. The appraiser will determine the fair market value of each of your major assets. They’ll also consider any liabilities that should be deducted, like loans or mortgages. This approach is best used for asset-heavy businesses where the income and market approaches are more difficult to apply.
The appraiser will consider the results of each approach and determine an overall valuation range for your business based on their professional judgment. The final valuation report will provide you a well-supported estimated price range you can use to confidently market and sell your business.
While business appraisals do require an upfront investment, they provide critical information to set an appropriate asking price, find qualified buyers, and close a sale at the best possible terms. The valuation approaches used can make a huge difference in determining your business’s fair market value.
Average cost ranges for small business appraisals
Getting a business valuation, also known as an appraisal, allows you to determine your company’s market value. Costs can vary quite a bit based on the size and type of your company.
For small businesses with less than 50 employees and under $5 million in revenue, you can expect to pay between $5,000 to $10,000 for a professional valuation. Complexity factors like multiple locations, diverse product lines, or strict regulatory requirements may increase the cost to $15,000 or more.
An independent valuation firm will typically charge based on the time required to analyze your financials and operations. They may use one or more established methods like the income, market, or asset approach to determine your business’s fair market value. The income approach, analyzing your company’s cash flows and earnings, often provides the most accurate estimate for small service-based or retail businesses.
Some brokers provide valuation services as part of a business’ listing package. While potentially more budget-friendly, a broker’s estimate may be less impartial. For the most objective assessment, an independent valuation professional is your best choice.
When interviewing appraisers, inquire about their experience valuing similar small businesses. Check their credentials and professional affiliations. An appraiser with niche expertise in your industry and valuation certifications will produce a higher quality report.
A professional appraisal provides an authoritative estimate of your company’s worth to help you set an asking price for selling your business or obtain financing. While the upfront cost seems high, a valuation can save you money in the long run and help maximize your business’s sale price. Comparing estimates from multiple appraisers may also give you a good range of values to work with.
In summary, expect to invest between $5,000 to $15,000 for a small business valuation. The final cost will depend on your company’s characteristics and the appraiser’s experience. An appraisal should provide an impartial estimate of your fair market value to achieve the best results when selling or refinancing your business.
Working with qualified appraisers for accurate valuations
Finding a qualified business appraiser is key to getting an accurate valuation for your company. Appraisers use their industry knowledge and experience to determine a fair market value for your business based on its unique attributes.
Look for appraisers with proper credentials and experience valuing businesses similar to yours. Appraisers with 5-10 years of experience can typically handle small to mid-sized companies, while larger firms may require 10-20+ years of experience.
Discuss the appraiser’s experience and credentials, as well as their methodology and valuation approach. Do they use the income, market, asset approach or a combination? How will they gather data on your business’s financials, operations, assets, growth, risks, and industry? The more detail they need, the higher the costs.
Request references from other business owners and see samples of previous valuations. Do they seem comprehensive and well-supported? Are their valuations accepted by courts, the IRS, and buyers? Qualified appraisers should be able to articulate how they determine value in a clear, data-driven manner.
While cost is a factor, don’t choose an appraiser based only on price. An inexperienced or unqualified appraiser could severely misprice your business, costing you time and money. Paying a premium for a reputable, experienced appraiser is often worth the investment.
Working with a qualified appraiser is the only way to get an objective, well-supported business valuation you can stand behind. Do your due diligence to find an appraiser with the right experience, credentials, and methodology to properly assess your company’s fair market value. The valuation report they produce should provide a defensible number you can use with confidence.
Start planning how to best position your company
So there you have it, a high-level overview of what goes into calculating your business valuation and how much it might cost you. While the process can seem complicated, working with an experienced broker and appraiser will help ensure an accurate valuation and smooth sale process.
Now that you know what to expect, you can start planning how to best position your company to get the maximum value. The effort will be well worth it when you're able to transition to the next chapter and reap the rewards of your hard work.
Still unsure where to start? Contact Pacifica Advisors. We offer a free advisory session to help you determine how to maximize the value of your business.
