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Business Valuation Guide: Do I need a Valuation?

As a business proprietor, you’ll inevitably grapple with a pivotal query: What is the value of my business?

The course many business owners undertake is enlisting a professional to ascertain this value. However, before you embark on a similar path, it’s imperative to grasp the following essentials:

  • What constitutes a valuation?
  • What’s the typical cost of a business valuation or appraisal?
  • Should I lean towards an appraiser, a broker, or my CPA to assess my business’s value?
  • Is a valuation genuinely indispensable for my business?
  • What constitutes the process of determining my business’s value?

When it comes to obtaining a valuation, you generally have three routes to consider:

  • A verbal assessment of value
  • A written report that doesn’t conform to appraisal standards
  • A formal, self-contained appraisal

Which valuation approach aligns with your needs? The choice hinges on your precise purpose for seeking a valuation. While many valuations adhere to legal requisites, if your objective centers around selling your business, such appraisals might not serve you optimally.

Determining the suitable standard of value for your business appraisal is a crucial facet. Most appraisals employ the fair market value (FMV) standard. However, it’s vital to recognize that FMV doesn’t encompass the strategic value for the buyer. Thus, an FMV-based appraisal for a middle-market enterprise might not accurately mirror its potential selling price.

Now, onto the pivotal question—whom to entrust with your business’s valuation and what costs are involved? The spectrum includes business brokers, M&A firms, CPAs, and business appraisers. Who best aligns with your unique context? What’s the cost? Should you opt for a $10,000 appraisal, or rely on a broker’s complimentary valuation?

This article takes you by the hand and addresses these queries head-on. You’ll gain comprehensive insights into each facet, including expert guidance on selecting an appraiser. Additionally, we’ll unveil our research findings, spotlighting the average valuation cost—culled from an in-depth survey of 45 prominent firms.

Choosing the Right Type of Business Appraisal

When pondering the necessity of a business appraisal, you’re presented with several choices. Although there isn’t a uniform classification for the different types of valuations, most evaluations can be categorized within three primary groups:

  • Verbal assessment
  • Written report for non-legal objectives (like a business sale)
  • Written report for legal requirements

Verbal Opinion of Value

A verbal (technically referred to as “oral”) estimation of value suits business owners seeking an assessment without requiring a written documentation. This form of valuation generally involves the appraiser, broker, or CPA scrutinizing the owner’s financial records and offering an informal estimate of value. Some business brokers and M&A intermediaries extend this service free of charge, while seasoned professionals typically levy a fee.

These concise assessments prove beneficial if you’re in the preliminary stages of considering a business sale, providing a rough notion of your business’s value before delving deeper into the process. We frequently offer verbal estimations to clients without the need for a formal report. Typically, a 30-60 minute conversation with a client guides our recommendation for the appropriate type of report. For most small businesses, a comprehensive formal report isn’t imperative.

Written Report, Not Complying with Appraisal Standards

Limited Appraisal Report: The realm of written reports spans from concise documents spanning a couple of pages to extensive manuscripts that can exceed 50 pages. It’s vital to note that these reports do not adhere to appraisal standards and hold no legal standing. We commonly term them as “business valuations, not intended for legal use.” The style of these reports varies widely, with some adopting a straightforward approach, while others assume a formal demeanor, adorned with technical terminology that finds relevance solely within legal contexts.

Within this landscape, the industry presents the concept of a “calculation of value” as an endeavor to offer a streamlined report catering to business owners. The cost spectrum spans from complimentary services to investments in the tens of thousands. These reports prove invaluable for business proprietors with sales ambitions. It’s important to recognize that, due to their deviation from appraisal standards, the formats of these reports diverge significantly. Categorizing the array of report types under this umbrella becomes a near-impossible feat.

Formal Appraisal (Self-Contained)

This category of report is mandated for legal undertakings like divorces, tax affairs, or bankruptcies. Often extending into hundreds of pages, these reports, while comprehensive, hold limited relevance for business owners aiming to sell their enterprises. Notably, the structure of these reports showcases greater uniformity compared to restricted appraisal reports, as they align with appraisal standards. It’s worth noting that the price point for these reports generally starts at $5,000 or higher. The need for this type of appraisal arises exclusively when legal requisites dictate its usage.

Choosing the Right Type of Valuation Based on Your Purpose

Business valuations serve a multitude of objectives.

The need for a business’s value arises in scenarios like divorce proceedings, tax planning, bankruptcy cases, litigation, buy-sell agreements, and strategic planning. Assessing economic damages for legal disputes and arranging financing also call for valuations.

Primarily tailored for legal requisites, most appraisals might not align optimally with your goal of selling your business. The reason is that these appraisals might not accurately mirror your business’s value in an open market sale.

Regrettably, many business appraisals are crafted with litigation or legal matters in mind.

These valuations often employ intricate language and complex formulas that offer little value to business owners seeking to sell.

For instance, a comprehensive assessment usually delves into national and local economic and industry factors impacting a business’s value—essential for appraisals bound by legal proceedings. However, business owners are typically well-versed in these factors and might not wish to invest in a report discussing the obvious.

Appraisals tailored for legal purposes must meticulously adhere to various legal standards.

For instance, a divorce appraisal might demand a specific value definition like “Fair Market Value,” while another purpose could necessitate the standard of “Fair Value.” These distinct standards can yield substantial differences in business value. Although pivotal in legal contexts, such distinctions might bear little relevance in the real business landscape.

Appraisals crafted for legal requisites are bound by stringent legal standards. With the evolution of the business valuation field, these standards have grown more intricate, resulting in lengthier standard business valuation reports over time.

Adhering to these standards demands increased preparation time and, consequently, escalates the appraisal cost. However, the practical outcome often falls short for business owners seeking to sell. The reports tend to be too cryptic and perplexing, rendering them of minimal utility in the real business landscape.

These standards can often perplex business brokers and M&A intermediaries, leading some to opt against offering business valuations. Simultaneously, the majority of individuals providing business valuations are typically business appraisers and CPAs, many of whom lack firsthand experience in selling a business. Their comprehension of the buying and selling process is rudimentary, and their understanding of the M&A marketplace is limited. This raises a pertinent query:

Would you be willing to invest substantial sums for an appraiser’s valuation, if that individual has never personally sold a business?

Choosing the Right Standard of Value: Fair Market Value Vs. Strategic Value

The majority of business appraisals adhere to the standard of fair market value (FMV). Fair market value can be succinctly defined as:

The price at which a property would change hands between a willing buyer and a willing seller, both being fully informed and free from any pressure to buy or sell.

However, it’s essential to note that FMV doesn’t encompass the strategic value perceived by the buyer. As a result, any business appraisal utilizing FMV as the standard of value for a middle-market enterprise is improbable to accurately reflect the potential actual sale price of the business.

Strategic value, also referred to as investment value, embodies a business’s worth to a specific purchaser. It encapsulates the extra value a business brings to a particular buyer’s portfolio. Businesses that align closely with the buyer’s profile and offer potential synergies hold a heightened strategic value for that specific buyer. Yet, gauging your business’s strategic value as the seller can be challenging. It necessitates an intricate understanding of the buyer’s enterprise and access to their financial data. The exclusive route to unraveling strategic value lies in a competitive auction process, where multiple buyers vie to secure your business.

For businesses priced below $5 million, fair market value (FMV) typically dictates the selling price. Conversely, many businesses commanding prices exceeding $5 million often secure deals surpassing the confines of fair market value.

  • If your EBITDA is less than $1 million: Opting for a company appraisal becomes logical when your annual cash flow (EBITDA) hovers below $1 million.
  • If your EBITDA is greater than $1 million: Enterprises with EBITDA surpassing $1 million annually often benefit from valuations as a means to establish a base price for the impending sale. A multitude of lower middle-market companies tend to fetch prices beyond fair market value when acquired by strategic buyers.

Choosing the Right Person to Value Your Business

Business Broker

Numerous business brokers extend the service of preparing business valuations for potential clients. While certain brokers entice prospective clients with complimentary reports, most experienced brokers levy a fee for this service. In cases where brokers work solely on a commission basis, a potential conflict of interest could arise. This potential conflict stems from the temptation to present an inflated opinion of value to entice client engagement. However, it’s worth noting that only a few business brokers possess more than a rudimentary grasp of business valuation. Consequently, locating a proficient business broker capable of accurately valuing your business may present challenges.

M&A Firms

Numerous Mergers & Acquisitions firms and intermediaries also extend valuation services to their clientele. These firms often furnish a streamlined valuation report, concentrating on your business’s value within the context of a potential sale. Leveraging their expertise in facilitating company acquisitions and sales, these firms are well-equipped to provide insights into your business’s valuation, particularly if the prospective buyer is anticipated to be a strategic acquirer. Furthermore, given that the value of most middle-market enterprises is established via auction processes, M&A advisors possess profound familiarity with this mechanism. Their counsel encompasses the interplay between the price attainable through a structured auction process and the foundational value reflected in a valuation report.


Accountants and CPAs occasionally provide valuation services to their clients. Certain CPAs are licensed business appraisers as well. While accountants possess a solid understanding of financial figures, they often lack experience in business sales. Therefore, if your aim is to assess your business’s value for selling purposes, accountants might not be the most suitable option. Conversely, larger accounting firms maintain dedicated M&A experts on their team, potentially making them better equipped for conducting valuations.

Business Appraisers

When it comes to legal valuations, business appraisers are undoubtedly the experts to turn to. Nevertheless, if they don’t possess practical experience in selling businesses, relying on them to value your business for a potential sale might not be the optimal choice.

Third-Party Appraiser

Numerous appraisers provide their valuation services through business broker networks. These networks promote their services to brokers, with costs ranging from a few hundred dollars to significantly marked-up rates, sometimes up to 1,000%. Many franchised broker networks urge their franchisees to promote third-party appraisal services. However, we usually advise against relying on third-party appraisers.

Choosing the Right Appraiser Based on Your Purpose

Choosing the Right Appraiser: Legal and Selling Purposes

For legal purposes, CPAs and business appraisers are your best choice when seeking a valuation.

When in need of an appraisal for legal matters, opt for a licensed CPA or a knowledgeable business appraiser.

For selling your business, business brokers and M&A intermediaries are the experts you need to accurately value your business and explore your exit options.

When selling your company, a comprehensive court-ready appraisal isn’t necessary. Instead, your advisor can provide a concise report focusing on the valuation methods that align with real-world buyer practices, which not only saves costs but also ensures valuable insights. It’s crucial that the chosen advisor possesses practical experience in selling businesses.

Choosing the Right Methods Based on Your Business & Purpose

Methods for Small vs. Mid-Market Businesses

Valuing a small business (revenue less than $5 million) differs significantly from valuing a middle-market business (revenue $5+ million). Regrettably, many valuation software solutions overlook this crucial distinction, leading to reports that might not align with your business’s needs. When seeking a business appraisal, inquire with the appraiser about their expertise in your industry and their regular experience valuing and selling businesses of your size.

How Buyer Types Affect Your Valuation

Valuing your business is a nuanced endeavor due to the diverse range of potential buyers. Buyers can fall into different categories, such as those seeking passive investments managed by others or those eyeing strategic integration to amplify their existing ventures.

Consider operational costs, where a second location might only marginally impact expenses. The specifics of your business, whether in size or nature, determine the most probable buyer type, consequently influencing the valuation multiple they would consider. Hence, it’s imperative that your chosen appraiser possesses an in-depth understanding of your potential buyer pool.

Other Considerations

The Downsides to Business Valuation Software

Due to the intricate legal standards, business valuation report software is primarily tailored for legal-oriented valuations.

Most appraisers utilize dedicated commercial business appraisal software in their valuation process, with some even developing their own tools.

For those aiming to sell their business, it can be challenging to find appraisers using software crafted for that purpose.

Regrettably, the outputs from many valuation software tools are densely technical, rendering them less valuable for business owners seeking to sell.

Before engaging a business appraiser, we suggest requesting a sample report. Review it and gauge its comprehensibility. If it’s unclear, consider alternative options unless the appraisal is solely intended for legal proceedings.

The Third-Party Valuation Myth

While business brokers frequently suggest third-party valuations, this is more common among brokers rather than M&A intermediaries. This recommendation often serves their interest, allowing them to sell valuations at a significant markup without necessitating the intricate appraisal expertise.

Within franchised business broker networks, it’s a standard practice to encourage franchisees to sell third-party appraisals, often marking them up by 200% to 500%. Yet, the drawback of such appraisals lies in the limited direct interaction with the appraiser. Consequently, our recommendation tends to steer away from third-party appraisals.

A Valuation is One Person’s Opinion

When you seek a business valuation, remember that you’re securing a professional perspective, an informed opinion rather than an absolute decree.

This valuation isn’t an unchanging truth; it’s a snapshot of value within a specific timeframe and present market conditions. It’s rooted in their grasp of your business, always considering a hypothetical buyer.

Marketplace Realities

Unlike the streamlined markets of real estate and stocks, the domain of small and mid-sized business sales is inherently inefficient. This contrast yields a broader spectrum of prices.

As a result, values fluctuate significantly over time. Thus, both the market and the methodology for selling your business can wield substantial influence over the eventual selling price.

Do Buyers Follow Valuations?

Buyer actions don’t always conform to valuations. An appraisal is an endeavor to gauge what an imaginary third party might offer for your business, taking into account the present economic climate, your business’s status, and the appraiser’s personal assessment of its risk and growth prospects.

This task is intricate, particularly when potential buyers for your business lack sophistication, resulting in a diversity of viewpoints unlike more refined buyers. Although predicting the behavior of sophisticated individuals is more challenging than predicting that of unsophisticated ones, buyer opinions are diverse—hence, there is no single “typical” buyer.

Process for Valuing a Business

Data Gathering

The majority of appraisals commence by examining three to five years’ worth of your profit and loss statements and balance sheets, accompanied by a company questionnaire. This data collection phase might be time-consuming for you (though CPAs tend to find it quite interesting), as it entails amassing a substantial volume of financial and operational details about your company.

Analyze & Normalize Financials

Upon acquiring this information, the appraiser proceeds to normalize or adjust your financial statements. This pivotal phase entails fine-tuning your financial statements to compute SDE or EBITDA, enabling a direct comparison of your business with others in your industry.

Additional Questions

During this process, effective communication with the appraiser is crucial, and your active participation greatly influences the accuracy of the appraisal. Feel free to ask questions whenever needed.

Compile the Report

Upon finalizing this stage, the appraiser proceeds to assemble the report using the data you’ve provided, along with industry-specific insights and information already gathered by the appraiser.

Average Price of a Valuation – Our Research Based on 44 Companies

We conducted a survey of 44 professionals including business brokers, M&A intermediaries, investment bankers, business appraisers, and CPAs. We inquired about their fees for appraising a small manufacturing company with annual revenue between $5 million and $10 million.

Here are the findings:

Business Brokers

Here is a summary of the responses:

  • Company #1 – Business Broker & Appraiser: Suggested a “Broker Opinion of Value” without specifying a price.
  • Company #2 – Business Broker, M&A Intermediary: Quoted $10,000 for a valuation.
  • Company #3 – Business Broker, M&A Intermediary: Advised a third-party valuation at $4,000.
  • Company #4 – Business Broker, M&A Intermediary: Priced their business valuation at $2,500.
  • Company #5 – Business Broker, M&A Intermediary: Provided a range of $3,000 to $5,000 for an appraisal.
  • Company #6 – Business Broker, M&A Intermediary: Offered a written opinion for $950 or a formal appraisal for $2,500.
  • Company #7 – Business Broker, M&A Intermediary: Presented a valuation cost between $950 and $2,500.
  • Company #8 – Business Broker, M&A Intermediary: Proposed a third-party valuation at $5,000.

Range: $950 to $10,000

Average: $3,771 to $4,500

M&A Firms

Here’s a compilation of the responses:

  • Company #9 – M&A Advisor: Suggested skipping appraisal and advised selling through an auction process.
  • Company #10 – M&A Advisor: Presented a valuation cost of $5,000 to $10,000, or an hourly rate of $350.
  • Company #11 – M&A Advisor: Proposed a 5% retainer based on estimated appraisal value, with additional services.
  • Company #12 – M&A Advisor: Offered a complimentary valuation for potential clients.
  • Company #13 – M&A Advisor: Did not recommend an appraisal.
  • Company #14 – M&A Advisor: Advised a third-party appraisal.
  • Company #15 – M&A Advisor: Did not recommend an appraisal.
  • Company #16 – M&A Advisor: Did not recommend an appraisal.
  • Company #17 – M&A Advisor: Did not recommend an appraisal, preferring an auction-based approach for higher prices.
  • Company #18 – M&A Advisor: Did not recommend an appraisal.
  • Company #19 – M&A Advisor: Provided options of $1,500 to $2,500 for a limited report and $5,000 to $10,000 for a business appraisal.
  • Company #20 – M&A Advisor: Required a proprietary $9,500 report.
  • Company #21 – M&A Advisor: Did not recommend an appraisal.
  • Company #22 – M&A Advisor: Did not recommend an appraisal.
  • Company #23 – M&A Advisor: Priced a business valuation at $6,500.
  • Company #24 – M&A Advisor: Suggested a third-party appraisal ranging from $10,000 to $15,000.

Range: $1,500 to $15,000

Average: $6,250 to $8,917

Investment Bankers

Here are the insights from the additional sources:

  • Company #25 – Full-Service Investment Banking Firm: Quoted a valuation cost of $12,000 to $17,000, with a process duration of four to five weeks. Their recommendation was to avoid setting a fixed price and instead pursue an auction process focusing on strategic value over fair market value.
  • Company #26 – Investment Banker: Did not provide specific pricing, indicating it varies based on multiple factors. They emphasized striving for strategic value.

Range: $12,000 to $17,000

Average: $14,500

Business Appraisers

Here are the insights from additional sources:

  • Company #27 – Business Appraiser: Quoted a valuation cost of $15,000 to $18,000.
  • Company #28 – Business Appraiser: Offered various fee structures, ranging from a basic report to a more comprehensive one based on the requirements.
  • Company #29 – Business Appraiser: Provided a range of fees: $3,000 to $5,000 for a verbal opinion of value and $10,000+ for a written report.
  • Company #30 – Business Appraiser: Mentioned pricing between $12,000 and $20,000, discussed different valuation standards based on purpose, and highlighted more rigorous reporting for legal appraisals.
  • Company #31 – Business Appraiser: Offered pricing of $2,000 to $3,000 for a calculation of valuation (a concise report) and $5,000 to $20,000 for a comprehensive business appraisal.
  • Company #32 – Business Appraiser: Quoted a range of $12,000 to $30,000, with options to begin with a basic report and upgrade to a more detailed one.
  • Company #33 – Business Appraiser: Stated fees of $7,500 to $10,000 for consulting on value for selling and $12,000 to $15,000 for preparing a legal-purpose report.
  • Company #34 – Solo Practitioner Business Appraiser: Mentioned pricing at $12,500 to $15,000.
  • Company #35 – Solo Practitioner Business Appraiser: Provided a fee range of $6,000 to $10,000.
  • Company #36 – Business Appraiser: Quoted a range of $3,500 to $6,000.
  • Company #37 – Appraiser, MBA, Economist: Stated fees of $5,000 to $10,000 for a limited report.
  • Company #38 – Appraiser: Priced a limited appraisal at $7,500.

Range: $2,000 to $30,000

Average: $7,885 to $13,038

CPA & Accounting Firms

Here are additional findings from various sources:

  • Company #39 – Publicly Traded Full-Service Accounting Firm: Offers valuations at a range of $10,000 to $15,000. Reports are comprehensive, spanning 80-100 pages, tailored for tax and compliance purposes.
  • Company #40 – CPA, Business Appraiser: Provides different valuation options – a verbal opinion of value for $2,000 to $3,000, a calculation report for $5,000, and a formal report for $8,000 to $10,000.
  • Company #41 – CPA & Business Appraiser: Sets a fee of $15,000 for a business valuation.
  • Company #42 – CPA & Business Appraiser: Charges between $5,000 and $7,000 for a business valuation.

Range: $2,000 to $15,000

Average: $7,500 to $9,167

Financial Advisory Companies

Here are the details from two more sources:

  • Company #43 – Financial Advisory Group specializing in business appraisals: Offers valuations for business sales based on an hourly rate. Appraisals intended for legal purposes start at $10,000 or higher.
  • Company #44 – International Financial Advisory Firm: Provides valuations within a range of $30,000 to $40,000.

Range: $10,000 to $40,000

Average: $20,000 to $25,000

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