The first and most important thing one needs to know about business appraisals is that there are two general types: compliance appraisals & market appraisals
Knowing which one you need will save you time, money, and potentially serious headaches down the road.
Compliance appraisals are used for complying with some external authority, such as the IRS or a court of law. If you bequeath your business to your son or daughter, you’ll need a business appraisal, because the IRS says so. If you and your spouse divorce, you will need a business appraisal, because the court says so. There are many examples of compliance appraisals, but they are share one common trait…they are required by an external authority to comply with the law.
Market appraisals are used to estimated the market value of a business at a particular time, under a set of assumptions. These assumptions can be varied, and include assumptions about the market of potential buyers. Is this business appraisal assuming a strategic buyer or a financial buyer? A general buyer, or a specific buyer? Market appraisals attempt to estimate the value of a company based on market forces under these assumptions.
Why This Is Important
Since the result of a market appraisal is based on market forces, and the result of a compliance appraisal is based on non-market forces (e.g. legal precedent of the established authority), the results are NEVER the same, and only similar by accident. ONE MUST CHOOSE THE RIGHT TYPE OF APPRAISAL TO GET THE RIGHT ANSWER.
For more about compliance and market appraisals, click here.