You’ve been eyeballing a business for a while, and now you are finally ready to buy. That’s great news! However, before purchasing, you should get the company appraised first. In this article, Mike Eisenga – a successful business and real estate investor – explains why you need to appraise the business you are buying.
Mike Eisenga, an accomplished entrepreneur with a background in banking and finance, says that there are multiple benefits of a business appraisal. Below, he explains how appraisers determine a business’s value and how potential buyers can negotiate a deal using what they learned through an appraisal.
What is a business appraisal?
The definition for a business appraisal is an economic analysis or professional engagement directed by an appraiser to determine what a business is worth. The appraiser is essentially the professional who assesses the value of the business being sold to generate a sale price that is fair. Someone who specifically appraises business properties should be an expert in pricing tangible and intangible property to establish a business’s value.
What is the process of a business appraisal?
There is more than one way an appraiser can value a business. Estimates might be determined based on the fair market value method, a liquidation value, a capitalization of earnings valuation, or another type of valuation method.
The fair market value method includes in its value vehicles, equipment, furniture and fixtures, and assets that are intangible. The price a property would sale for on the open market to a willing buyer from a willing seller is what is considered a fair market value.
A liquidation value is deemed the most extreme valuation due to the nature of a business owner only getting a minimum value return while addressing a halted business and quick sell of all assets.
A capitalization of earnings valuation has the future in mind when finding a business’s value. This valuation bases the present value of a company on projected earnings or cash flows for the future.
What are the benefits of an appraisal?
Obtaining a business appraisal will pay back in more ways than one. For anyone who is about to own a business, it is critical to understand company assets better or determine the value of the business through a business appraisal.
By revealing an accurate business valuation assessment, a buyer can factor in proper insurance coverage along with a more precise number on how much the buyer should reinvest back into the business once obtained. A business appraisal can also show today’s resell value of the company and the company’s true value. Buyers should pay attention to the company’s income and growth rate over the past five years. Buying a business to continue it under new management means being smart about what business you buy, and seeing steady, consistent growth over past years is a promising sign.
Potential buyers can also gain insight from a business appraisal that will benefit them while negotiating a deal with the seller. A buyer can see what kind of value they are dealing with and use that to determine an all-in price.
About Mike Eisenga
Mike Eisenga is a successful commercial real estate investor with a banking and finance background and is the former mayor of the City of Columbus. As a President of both American Lending Solutions, a mortgage lending company (he founded and operated from 2000 to 2018), and First American Properties, he has a track record of creating and operating successful businesses. Mr. Eisenga is also devoted to property development and construction, primarily serving smaller local communities. Especially in the senior housing sector.