Knowing what your business is worth is one of the most important steps you can take as an owner. Whether you are getting ready to sell, planning your next chapter, or want a clear picture of where you stand, understanding your business’s value is an important first step. Having reliable information gives you the confidence to make informed business decisions.
In this blog, we’ll answer the question, “What are appraisals in business?” We will also explain how they work, covering who conducts them, when you might need one, and the key factors that influence the final valuation.
What Is a Business Appraisal?
A business appraisal is a professional assessment that estimates how much your business could sell for on the open market. For many Australian small and medium-sized businesses, an appraisal is often based on normalised EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), with one-off or non-recurring items removed to reflect the business’s ongoing earning capacity.
That adjusted profit is then multiplied by a figure known as a “multiple”, which reflects what buyers are willing to pay for similar businesses. Depending on the business and the valuation method used, business assets may also be taken into account.
Business Appraisal vs Business Valuation
Although business appraisal and business valuation are often used interchangeably, they are not the same. Here’s how they differ:
- Business appraisal: A practical, market-based estimate, usually prepared by a business broker. It provides you with an estimated selling price to help you price your business and prepare it for sale.
- Business valuation: A formal, detailed assessment prepared by a qualified business valuer. It is commonly required for legal proceedings, certain tax matters, and other situations where an independent valuation is needed.
How Is a Business Appraised?
The business appraisal process involves several key steps, from reviewing your financial information to analysing your business and determining its value. Understanding how each stage works can help you know what to expect.
1. Gathering Your Information
The appraiser first gathers the information needed to understand your business, its financial performance, and the factors that influence its value. You may be asked to provide:
- Financial statements from the past three to five years
- Tax returns and other financial records
- Profit and loss statements
- Details of business assets, including equipment and stock
- Lease agreements, supplier contracts, and other key business agreements
- Business registration, licences, and industry-specific documents where relevant
2. Reviewing How the Business Runs
Next, the appraiser looks at how your business operates day-to-day. This may involve a discussion with you, a review of your processes, or a visit to your premises. The goal is to understand the key factors that contribute to your business’s value.
3. Adjusting the Profit
This stage involves adjusting your reported profit to reflect the ongoing earnings a new owner could reasonably expect from the business. Common adjustments may include:
- Owner wages or benefits that are above or below market rates
- Personal or non-business expenses paid through the business
- One-off or non-recurring costs that are unlikely to occur again
4. Applying the Multiple
Once the adjusted profit has been determined, an appropriate valuation method is applied to estimate the business’s value. For earnings-based appraisals, this often involves applying a suitable multiple that reflects factors such as your industry, business size, growth potential, and risk level.
Most business appraisals use one or more of the following common approaches:
- Earnings-based: Uses the business’s maintainable earnings or future income potential to estimate value.
- Market-based: Compares your business with similar businesses that have recently sold or are currently being valued in the market.
- Asset-based: Calculates value based on the business’s assets, minus its liabilities.
Who Conducts a Business Appraisal?
In Australia, business appraisals can be prepared by a range of professionals, including business brokers, accountants, and business advisors with relevant experience. An appraisal is usually a market-based estimate that helps owners understand what their business may be worth.
When choosing someone to appraise your business, look for a professional with:
- Experience in your industry or sector
- A strong understanding of current market conditions
- A clear valuation approach they can explain in straightforward terms
A broker who regularly works with businesses like yours can provide valuable insight into market expectations and what buyers may be willing to pay. This practical knowledge can help support a more realistic assessment of your business’s value.
When Might You Need a Business Appraisal?
There are several situations where understanding your business’s value can help you make better decisions.
- Preparing to sell: A realistic figure lets you price your business accurately from the outset.
- Planning your exit: An appraisal gives you a clear starting point as you plan the handover.
- Securing finance or attracting investors: Lenders and investors want to understand the value of a business before committing.
- Estate planning: Your business value forms part of your broader personal and family planning.
What Factors Affect a Business Appraisal?
A range of factors can influence your business’s value. Understanding these factors can help you identify areas that may improve your position before an appraisal. This includes:
- Financial performance: Steady, consistent profit over three to five years is a strong sign. Appraisers look at whether your revenue and profit are growing, holding steady, or declining, and the reasons behind any big changes.
- Customer spread: A business that relies heavily on one or two clients carries more risk than one with a wide customer base. Regular, repeat income, such as ongoing contracts, is viewed more favourably than one-off jobs.
- How much the business relies on you: A business that depends entirely on the owner tends to be valued lower. A Standard Operating Procedure (SOP) gives a buyer confidence that the business will keep running smoothly after you leave.
- Debts: Existing loans, finance agreements, and other liabilities are considered as part of the appraisal. The level of debt can influence how buyers assess the business and its overall value.
- Lease arrangements. A long-term, favourable lease can be a real advantage for a buyer who wants to stay in the same premises.
Appraisals in Business: Key Takeaways
Understanding what appraisals are in business is a useful and reassuring step for any owner considering a sale, planning ahead, or simply wanting a clearer view of where they stand.
If you are thinking about selling a business in Queensland and want to understand what it is worth, the team at Stockbridge Business Brokers is here to help. We offer confidential, no-obligation appraisals based on current market conditions. Get in touch to book your appraisal today.