7 Business Evaluations and Appraisals to Determine Business Value

7 Business Evaluations and Appraisals to Determine Business Value

7 Business Evaluations and Appraisals to Determine Business Value

There are many circumstances where a formal Business Valuation is required. Business valuations are geographincally influenced, a Business Valuation in Houston Texas might create a different value than a similar business in New York.Business Valuations are also known as Business Appraisals. As you might imagine Business Appraisal is a complicated business. There are different kinds of appraisals for different circumstances. Here is a summary:

1) Business Appraisal “Calculation of Value”

This valuation is often used in Buying a Business or Selling a business. The premise is that buyer has no formal ties to the business and the transaction is an arms-length transaction for the sale of 100% of the business.  This valuation is generally viewed as a purely financial opinion of market value and makes no assumptions about how a specific buyer might value the business.

2) Estate Plan Valuation

This is a valuation done for business owners who have the business inside their estate and required the appraisal for tax planning issues.

3) Buy/Sell Partner Appraisal

This is often used when one business partner is buying out another business partner.

4) ESOP Appraisal

This is used when the company is installing an ESOP (Employee Stock Ownership Plan) so that the employee-owner have a way to understand the value their business ownership interests.

5) Divorce Valuation

Self-explanatory and similar in many ways to the Partner buyout valuation listed above.

6) Personal Goodwill Valuation

Sometimes used in a business transaction where an owner is personally involved and critical to the business. For instance, a world renown heart transplant surgeon likely has a lot of personal goodwill built up because people seek out that surgeon INDIVIDUALLY. If that surgeon left the business it’s likely many patients would not contact the business.

7) Minority Interest  Valuation

This is a valuation used to assess the value of an interest in a business where the minority ownership is not liquid. For instance, if I own shares of IBM I call my broker and have the shares sold at a published price in 5 minutes. However, if I own 10% of XYZ, INC that is not a publicly traded company with 90% owned by my boss Mary, then I would need to try to find someone to buy my 10%. In this case, since Mary owns 90% of the company and is my boss, my 10% is probably not worth 1/10 of 100% value of the company. This valuation helps determine what your 10% is really worth

Business Valuation as it relates to Business Sale Price Calculation and Working Capital

Business Valuation as it relates to Business Sale Price Calculation and Working Capital

General definition. Current assets – current liabilities = Net Working Capital

In most cases the valuation of a business does not include the net working capital of the business at the time of the valuation. Working capital is often excluded from valuations so that business values can be compared to other similar businesses without the need to adjust for working capital. If 2 businesses are identical except one has $1,000,000 in excess cash it won’t affect the valuation comparison because the excess cash is not in the valuation price for the businesses.

However, the working capital can affect the actual selling price of a particular business if the working capital is included in the sale.


Let’s say Business A is valued at $5,000,000 and business B is valued at $5,000,000, both without working capital. If business A has $700,000 in net working capital and business B has $1,500,000 in net working capital, and the buyer wants to buy the working capital with the business, then business A will sell for $5,700,000 and business B will sell for $6,500,000 even though both were valued at $5,000,000.

Many buyers want to buy a business with adequate or normal working capital. By doing this the buyer has a set amount of capital to raise that allows them to purchase the business. This capital to buy the businesses is likely long term capital. By including working capital in the purchase, after the sale, the business can operate on the purchased working capital.

The larger the transaction the more likely that working capital will be included in the business sale. The working capital target number (i.e., the amount specified in the LOI to be included in the purchase price) is an important negotiated element of a deal. In the LOI it might be a dollar amount or often an agreed to formula (since the working capital moves virtually every day the business is open) to use to get to a working capital number at closing. Make sure all elements of the working capital calculation is defined and understood.

Common Working Capital Elements

(with notes on the tricky ones);


  • Cash and cash equivalents
  • Accounts receivables
  • Inventory
  • Deposits – Deposits business has at vendors or other i.e., tax deposits, lease deposits, etc)
  • Work-in-Progress – Does your accounting system account for this properly? WIP can also be a liability depending on billing practices.


  • Accounts payable
  • Accrued payroll
  • Vacation owed employees
  • Gift certificates Does your accounting system track?
  • Warrantys Outstanding for products or services
  • Prepaid service or maintenance agreements
  • Deposits from customers