You’re probably familiar with this phrase as it applies to selling a home, in which an appraiser will determine what a fair asking price is based on their assessment of the home. But appraisals also apply to a business’ value as well. In this case, appraisals make sure that minority shareholders get the fair market value of their stock in the event of a merger.
Not just anyone can appraise something though. It takes skill and of course, the approval of the government to tell you that you can in fact appraise at will.
Appraisals can also be used for tax purposes or to determine the value of a business to get ready for its sale (just like a home).
This involves looking at the market value of the business, which can be tricky. There are two popular ways to do this.
The first is the income approach, which estimates a startup’s value by assessing projected earning potential against current value. This is the amount you expect the business to generate eventually versus the amount it’s generating now. The ultimate goal is to determine a fair measurement of market expectations that will give an indication of the current value of the company.
In contract, the market approach uses valuations of similar companies to reach its valuation verdict, setting a value based on what other businesses have been sold for that are similar to the startup in question. This of course is really hard to do when there isn’t a similar business in the area to compare against.
We’re expecting big numbers from the appraisal this weekend because our company is badass.