Valuing or Appraising a Business for Sale

Under the Real Estate Act 2008 Real Estate agents are required to appraise a business for sale prior to entering into an agency agreement to sell the business. An appraisal is different from a valuation but to all intents and purposes uses the same methodologies and approachs.

In preparing an appraisal the Real Estate Business Broker can use both methods and approaches to establish a value for the business and often the range at which offers are lightly to be received.

The range is relevant because every buyer has a different motivation and it is important for the vendor to clearly understand this. Their assessment of the businesses' inherent value is based on how they intend to develop it, whereas the business specialists role is to seek out the buyer who will be willing to acquire the business for the highest value. 

Business valuation itself is a mix of art and science. There are several approaches used in the valuation methodologies used by the New Zealand Institute of Valuers and there are many opinions on how a business should be valued.

For valuation purposes practioners first look at what approach they will use and then which method they will use that will suit the basis on which they have been asked to prepare the valuation of the business. They will then put a stake in the ground to prepare a valuation based on the approach and methodology.

The Real Estate Business specialist will also look at all the approaches, methods and related hybrids to arrive at their assessment of both the value and the range in values they think buyers will attempt to work in. But they will also look at the ranges that covers all buyers.

It is often said that the method that matters, however, is the method used by the person who is going to buy your business. But it is the Business Specialists role however to clearly understand the buyers motivation when working with the vendor.

Understanding how all the different methods work will help the broker get to grips with how a purchaser thinks.

There are any number of reasons for valuing a business other than buying or selling. Businesses can also be valued for estate and tax purposes, divorce settlements and or obtaining finance. If valuing for the purpose of minimising income tax, you generally like to keep the figure low; if valuing for a sale, you want a figure as high as possible. Obviously these two methods cannot both be right so the Business specialist's role is to find the method that best fits your business when you want to sell.

 See the section on Common Valuation Methodologies