Business appraisal vs formal valuation: which do you need?
An indicative appraisal estimates what your business would sell for, to help you set an asking price. A formal valuation is a detailed, independent opinion of value, prepared by a qualified valuer to professional standards, for when the figure has to stand up to someone else: a bank, the ATO, a family law settlement, a shareholder dispute or a court. If you're selling, an appraisal is usually enough. If someone else will rely on the number, you need a formal valuation.
What an indicative appraisal is
An indicative appraisal is a market estimate: what a buyer is likely to pay for your business today. It's the kind of figure a business broker gives an owner before listing a business. It usually:
- works out maintainable earnings from your profit and loss, with the add-backs shown
- applies the range of multiples buyers pay for businesses of that type and size
- checks the result against comparable businesses for sale
- gives a price range, usually plus stock at value
It relies on the figures you provide, and nobody audits them. It's quick and inexpensive, and it's designed for one job: helping you decide on a realistic asking price. How small businesses are valued.
What a formal valuation is
A formal business valuation is an independent expert's opinion of value at a specific date, set out in a written report. In Australia, it's usually prepared by an accountant who specialises in valuations, or by another professional valuer.
Accountants who are members of the main Australian professional bodies must follow the valuation standard APES 225 Valuation Services. It recognises three kinds of engagement:
- Valuation engagement: the full valuation, using whatever approaches and procedures a reasonable, informed valuer would use for that business.
- Limited scope valuation engagement: a valuation where the scope of work is restricted. The standard notes it's also sometimes called an "indicative" valuation.
- Calculation engagement: a calculation using approaches the valuer and client have agreed in advance.
Don't confuse an "indicative" valuation under APES 225 with an indicative appraisal for pricing a sale. The first is still a professional valuation, prepared under a formal standard.
The differences at a glance
| Indicative appraisal | Formal valuation | |
|---|---|---|
| Main purpose | Setting an asking price for a sale | A figure others will rely on: finance, tax, legal and disputes |
| Prepared by | A business broker or appraisal service | A qualified valuer, often a specialist accountant |
| Standard | No formal valuation standard | Professional standards, e.g. APES 225 for accountants |
| Your figures | Taken as provided | Examined and tested by the valuer |
| Main method | Maintainable earnings × market multiple, checked against listings | One or more methods chosen by the valuer, with the reasons explained |
| Time | Minutes to days | Often weeks |
| Cost | Low, or free from some brokers | Higher; depends on size, complexity and purpose |
| Stands up to a bank, the ATO or a court? | No | That's what it's for |
When you need a formal valuation
- Family law. Dividing property after a separation, where the business is part of the asset pool.
- Tax. When market value matters for tax, such as some capital gains tax calculations, transfers between related parties, or checking eligibility for small business CGT concessions. The ATO looks mainly at how a valuation was done and whether it's properly supported. (ATO: Market valuation for tax purposes)
- Shareholder or partner matters. Buying out a partner, a shareholders' agreement, or a dispute between owners.
- Finance. Some lenders want an independent valuation, although many rely on their own assessment of the figures.
- Courts and disputes. Any legal proceeding where the value of the business is in question.
- Estates, insurance and self-managed super funds, where a market value has to be documented.
In all of these, get advice from your accountant or solicitor about the kind of valuation you need before you engage anyone.
When an appraisal is enough
- You're thinking about selling and want a realistic price range.
- You're about to list the business, and you need an asking price you can explain to buyers.
- You want to check an offer, or an asking price a broker has suggested.
- You're planning ahead: working out what to improve before a sale in a year or two.
When you sell, it's the market that decides the price, not a valuation. A buyer pays what the business is worth to them, backed by their own accountant's checks. What sets your asking price is a well-supported estimate of what buyers will pay. An online calculator can give you a rough idea first: what a business valuation calculator can and can't tell you.
How to get a formal valuation
- Be clear on the purpose. The purpose (family law, tax, finance or a dispute) decides what kind of valuation and report you need.
- Find a qualified valuer. Ask your accountant or solicitor for a referral, and check the valuer's qualifications and experience with businesses like yours.
- Agree the scope and fee in writing. Ask for a fixed quote and confirm which kind of engagement you're getting.
- Prepare your records. Expect to provide several years of financial statements, tax returns, the lease, asset lists and details of the business's operations.
Selling? Start with an indicative appraisal
AUS Brokers turns your own P&L into an indicative appraisal: maintainable earnings with the add-backs explained, the multiple range for your industry and size, and comparable businesses for sale in your state. It's built for setting an asking price, and you can add a buyer-ready profile to market the business yourself.
An indicative appraisal only. AUS Brokers doesn't provide valuations, and doesn't act for buyers or sellers. Selling in Victoria? Vic Brokers can sell it for you.
Frequently asked questions
What is the difference between a business appraisal and a valuation?
An appraisal estimates what a business would sell for, to help set an asking price, and relies on the owner's figures. A formal valuation is an independent expert's opinion of value, prepared to professional standards, for when a bank, the ATO, a court or a family law settlement will rely on the figure.
Do I need a formal valuation to sell my business?
Usually not. For setting an asking price, an indicative appraisal is normally enough, because the buyer and their accountant will test the figures themselves. You need a formal valuation when someone else must rely on the number, such as in family law, tax or a dispute.
How long does a business valuation take?
A formal valuation often takes a few weeks, depending on the size of the business, the purpose and how quickly the records are provided. An indicative appraisal takes much less time.
How long is a business valuation good for?
A valuation is an opinion of value at a specific date. How long it stays useful depends on how much the business and the market change after that date. For legal or tax purposes, the valuation usually needs to be at the date that matters for that purpose, so an older one may not be accepted.
Who can do a formal business valuation in Australia?
Usually an accountant who specialises in business valuations, or another professional valuer. Accountants who are members of the main Australian professional bodies must follow the APES 225 valuation standard. Ask your accountant or solicitor for a referral suited to your purpose.
General information only, not legal, financial or tax advice. Get advice about the kind of valuation your situation needs.