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You must avoid making these mistakes when getting a business appraised as they could cost you your business. Here are the top 7 mistakes when getting a business appraised:

1. Not considering the approaches that you can take when it comes to valuing a business – there are three approaches that you should consider and they are:

• The income approach – This approach is where the value of a business is based on the sum of the current value of likely economic benefits.
• The market approach – This approach is where the value of a business is calculated by comparing it to other similar businesses that have been sold in the area.
• The asset approach – This entails making adjustments to a business’ assets as well as liabilities when it comes to their market values.

2. Not thinking about the discounts that might be applicable – the usual discounts that can be applied when it comes to business valuations are the ones for a lack of control as well as for the lack of marketability.

3. Not knowing the standards of value – for an operating business, the value standards will most likely be one of the following:

• Fair market value – simply put, this is the price which is determined in terms of cash equivalents.
• Fair value – this is used when it comes to issues that range from dissolving marriages to nonconforming shareholder suits.
• Investment value – this is normally used for transactions when the buyer who wants to acquire the business makes a return on investment (ROI) assessment to determine the value of the business.

4. Not knowing the difference between an appraisal and a fairness opinion – an appraisal entails knowing about a business’ industry, economic conditions as well as trends, among others. Meanwhile, a fairness opinion is an expert’s opinion on whether or not the value of the transaction being proposed is going to be fair for the new business owners.

5. Not knowing the difference between enterprise value and equity value – enterprise value is commonly known as the value of the invested capital of the business, including the value of equity as well as the value of the firm’s liabilities.

6. Not knowing the court rulings in developing an indication of value – a business appraiser ought to consider important legal issues that affect the valuation of the business.

7. Not knowing the primary factors that make an impact on the value of the business – a business’ value is impacted by certain factors which include:

• Financial performance – just keep in mind the equation: poor earnings = low business value
• Growth prospects – revenue growth in certain aspects of the business could mean that there will be opportunities for business expansion.
• The competitive nature of the industry – the business may be negatively impacted when there is new competition.  The entry of new competitors in the industry could mean lost market share and lower profitability.
• Management – a management team that has the necessary experience as well as depth will have a positive impact on business value if the team stays with the business after it sells.
• Economic industrial condition – the strength of the economy affects all businesses. Industry conditions, while impacted by the economy, are also influenced by different factors, such as competition, innovations and trends, among others.