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A business appraisal is also known as a valuation. This is a process in which a professional, such as an accountant, looks at the various assets of a business and determines how much a business is worth. Appraisals are often requested by business owners who are considering selling their business, selling shares, or merging with other organizations. A typical business appraisal includes valuation of inventory, equipment, staff, business models, and reputation. Since many of these assets can be difficult to price, especially those which are not tangible, such as models and reputation, an appraiser is expected to compose detailed reports that include explanations for why assets are assigned certain values.
While a business owner might use a business appraisal before selling a business, he or she also might hire an appraiser in order to determine the success of an operation. Seeing where a business is losing value can be educational for those who are looking for ways to optimize operations.
Valuation of hard assets is normally the first step of a business appraisal. Hard assets are those that are tangible, such as inventory and equipment. Cost of these assets, as well as the health of pieces of equipment are taken into account. Factors such as cash flow may also be taken into account in the early stages of an appraisal.
A business's value can also be determined by the number of dedicated customers it has and the reputation it has established. In many cases, a business that has been around for many years has a certain level of quality associated with its name. In these instances, a business's name and logo can be considered to have value in a business appraisal since they can attract an already established customer base.
An appraisal also may focus on the competency of staff and the effectiveness of business processes. If processes are working well, there is little time wasted between stages of production and equipment and staff members are smartly deployed so that they can be of most value to a company. In cases where business models are not effective, a business' value can be decreased since the purchaser may have to implement new practices, which can be costly.
Appraisers also look at vendors and suppliers that provide a business with its materials. If a business uses suppliers that charge too much for their goods and services or if they have a reputation for late deliveries, this can also decrease a business's value. Poor performance by suppliers can slow productivity and create waste that leads to devaluation.