Business valuation, business evaluation, and business appraisal: aren’t they all the same thing?
The simple answer is no.
You’ve heard the terms. Maybe you’ve even gone through one of the processes. But are you still unsure of the difference between the three? In this post, we’ll take a look at the difference between a business evaluation and business valuation to determine which is the right course for you.
Let’s look at what the Merriam Webster Dictionary has to say on the matter:
“Valuation” is the act or process of valuing, to determine the market value (as an estimate) of a thing.
“Evaluation” refers to the act of evaluating, the determination of the value, nature, character, or quality of something or someone.
“Appraisal” is an act or instance of appraising something or someone, especially : a valuation of property by the estimate of an authorized person.
No wonder there is confusion. The words evaluation and valuation are incredibly similar. Furthermore, their definitions sound much the same. But the difference between these two words in the business world, when it comes to financial matters, is significant. And when you throw appraisal into the mix, there are some details that muddle the three terms.
Let’s a take a quick look at how these terms work for a business:
An evaluation is more of an assessment or a check-up.
A consultant assesses the entire business organization to determine:
- its operating effectiveness
- areas in need of improvement
- the possible growth potential of the business
Evaluations include an in-depth look at employees, business hours, financials, and more.
What’s more, it means assessing the operations of the business to see how effectively and consistently it generates cash flow. Hence an evaluation of a business measures the intangible rather than the tangible.
When would you get a business evaluation?
You might be wanting to:
- improve cash flow;
- determine if a proposed expansion of your company is a good idea;
- understand what is no longer effectively moving your business strategy forward.
Many would say that a business valuation is the same as a business appraisal. Others would state that the two are completely different processes. They would say this because an appraisal only includes the tangible assets, whereas a valuation considers the tangible and the intangible.
For our purposes here, we will consider the two terms as synonymous. In today’s climate the two tend to be interchangeable anyway. However, business valuation is currently the more acceptable and more commonly used term.
The primary purpose of a business valuation is to determine a company’s financial value in the marketplace. A business valuation looks at all assets in relation to all risks and liabilities.
With these it places a value on a business. Valuations estimate the fair market value or economic value of the business based on a dollar amount. The valuation process includes the counting of assets, inventory, fixtures, goodwill, etc.
When would you get a business valuation?
- Around year two of a new business.
- If competitors have been showing an interest in buying you out.
- You have expansion plans and need help funding them.
- There is a potential change in the ownership of a business.
- When a vested partner opts to leave a business.
- Every 5-10 years or more often if you are executing your exit strategy.
- If you intend to gift shares to your family.
Other things to know about business valuations
- Commercial lenders, business investors, legal professionals, tax authorities and courts can order a business valuation.
- The purpose of the valuation and the entity who ordered it affects the method they will use to obtain its value.
- A third party with no interest in the company must perform the valuation for it to be valid.
If you want more information on business valuations, you can check out our blog “A Simple Guide to Understanding Business Valuations” .
We Can Help
You now have a better understanding of the three terms. So, it is time to pursue a business evaluation or valuation?
Although both are straightforward processes, they can get pretty complicated. And this is why we are here. Our team at Saddock Advisory thoroughly understands both processes.
Contact us here. Our experts will make sure you understand all the aspects of business valuations and evaluations. We will also help you determine which one you’ll need right now. Finally, we will effectively complete a valuation or evaluation of your business.