What to Know About Appraisals
An appraisal is an unbiased, objective measure of the present value of a company, asset or organization. For example, houses are commonly appraised by professionals in anticipation of an upcoming sale. The appraiser will examine the house and the market in multiple ways: internal inspection, real estate trends, comparable recent sales, etc. Ultimately, the appraisal will play a dominant role in the asking price — and then, the selling price — of the house.
Appraisals are important to any organization. They can be used for facilitating sales and mergers, settling legal disputes, determining the value of intellectual property, calculating tax liability, and a variety of other reasons.
Business Appraisal Methods
There are quite a few different methods for conducting an appraisal. The type of method used depends on both the item being assessed and the purpose of the appraisal itself.
For instance, business appraisals are often conducted in anticipation of a sale or merger, or perhaps in preparation for tax season. These business appraisals commonly use the book value method of appraisal, which involves subtracting the business’s liabilities from its assets.
Another way of appraising the value of a business is to use the capitalization of earnings method. Here, the appraiser uses documented earnings to determine an overall value. The analysis gives more weight to the most recent earnings, and progressively lower and lower weight to earnings in the more distant past.
The future earnings method also involves examining a business’s earnings. Unlike the capitalization method, however, the future earnings method examines projections of a company’s future earnings. A discount rate is applied in order to offset some of the uncertainty involved in the projection of future earnings.
As mentioned, there are plenty of other assessment methods as well. An appraiser must consider the circumstances of the case and the needs of the client when determining which to use.
How to Use Appraisals
Now that we’ve explored how to conduct appraisals, let’s look at why we would want to in the first place. Appraisals can be used to accomplish a variety of goals. Here are a few common ones:
Whenever a business is bought or sold or two companies merge, an appraisal must be completed in order to determine the most accurate value of the company being acquired. Because of the subjective nature of the appraisal process, both the buyer and the seller might conduct appraisals in order to decide what they think is a fair price.
An appraisal is often necessary when dealing with legal disputes among businesses, such as those involving breach of contract or negligence. The court that handles the case will often require an appraisal of the business; this way, if the court finds that one party must reallocate funds, sell the business, or liquidate assets, the details are all ready.
Businesses need to employ appraisers in order to determine the amount of tax owed for their business. To determine certain tax liabilities, the overall value of a business needs to be assessed.
If you think you may need an appraisal in the near future, reach out to Boxelder today for a free consultation. Our experienced team can take a look at your business or assets, recommend the best valuation method, and produce an accurate appraisal.