Business Appraisal vs Valuation: Which Do You Need to Sell Your Business?

By Michael White, Director and licensed estate agent

If you're selling your business on the open market, a broker's appraisal is usually what you need. It tells you what buyers are likely to pay right now. A formal valuation is a written report from an independent valuer or accountant, and you need one when the law, the tax office, a court or a lender asks for a defensible figure. Many owners never need both. This guide explains the difference and how to tell which one fits your situation.

What a business appraisal is

A business appraisal is a broker's opinion of the price your business would sell for in today's market. It's built from the same things buyers look at:

What the business really earns. We start from your profit and adjust it for one-off costs and owner's wages, so buyers see the earnings they would take over.
What similar businesses are asking. Our Victorian business asking prices page shows current asking prices by industry, updated monthly.
The lease. Years remaining, options and rent can lift or cut the price.
Equipment, stock and goodwill. What's included, and what buyers pay for on top.
How much the business depends on you. A business that runs without the owner is worth more to a buyer.

In Victoria, giving a market appraisal of a business is work that needs an estate agent's licence (or employment by a licensed agent), according to Consumer Affairs Victoria. So check who is giving you the figure.

Our free business appraisal is confidential, with no obligation to sell.

What a formal valuation is

A formal valuation is an independent written report prepared for a particular purpose and a particular date. The valuer sets out the method, the evidence and the figure, so someone else can check it.

The Australian Taxation Office says a market valuation report should at least state the purpose and scope of the valuation, details of the asset, the date, the records behind the value and the value itself. It also says valuations by professional valuers are more credible than those from someone who isn't a professional valuer.

A formal valuation answers a different question from an appraisal. It asks "what is this worth, and can we prove it?" rather than "what will buyers pay?"

When you need a formal valuation

The ATO lists situations where taxpayers may need a market valuation, including:

small businesses meeting the asset threshold tests for the capital gains tax concessions
transfers between related parties, such as family members, that aren't at arm's length
businesses that consolidate for income tax purposes.

Owners also commonly ask for a formal valuation when:

one partner or shareholder is buying out another
a business is part of a family law property settlement
a bank or lender asks for one
the business, or shares in it, is going into or out of a self-managed super fund.

If any of these applies, your accountant or solicitor will usually tell you what kind of valuation they need and who should prepare it.

When an appraisal is the right choice

An appraisal fits when:

you're thinking about selling in the next year or two and want to know where you stand
you're setting an asking price for an open-market sale
you want to know which changes would lift the price before you sell
you're comparing the sale price with what you'd need to retire or move on.

A buyer doesn't pay what a report says the business is worth. They pay what the market will bear. That's why an appraisal is built around buyers, recent asking prices and the things buyers check during due diligence. Our guide to how business valuations work in Victoria explains the method in more detail.

Can you use both?

Yes. Some owners get an appraisal first to decide whether to sell, then ask their accountant for a formal valuation because a capital gains tax concession or a partner buyout depends on it. Others start with a formal valuation for tax and then ask a broker how the market sees the business. The two figures won't always match, because they answer different questions.

What to have ready

For an appraisal, have your last two or three years of profit and loss statements, a current year-to-date figure, your lease, a list of equipment and an idea of stock on hand. See what to have ready on our appraisal page, and our 12-month plan to prepare your business for sale if you're selling later.

When you're ready to sell, here's how we sell businesses in Melbourne and across Victoria.

Common questions

Is a business appraisal the same as a business valuation?

No. An appraisal is a licensed broker's opinion of the price your business would sell for in today's market. A formal valuation is an independent written report for a stated purpose and date, often needed for tax, legal or lending reasons.

Do I need a formal valuation to sell my business?

Usually not. For a sale on the open market, an appraisal based on your earnings, lease and what similar businesses are asking is what you need to set a price. You may also need a formal valuation if a tax concession, a related-party sale or a partner buyout depends on the figure.

Who can give a business appraisal in Victoria?

Consumer Affairs Victoria says giving market appraisals of businesses requires an estate agent's licence, or employment by a licensed agent as an agent's representative. Ask for licence details before relying on a figure.

When does the ATO need a market valuation?

The ATO lists situations including small businesses meeting the asset threshold tests for capital gains tax concessions, non-arm's-length transfers between related parties, and businesses that consolidate for income tax. Your accountant can tell you whether it applies to you.

How do I get a free business appraisal in Melbourne?

Request one on our appraisal page or call 03 9918 6739. It's confidential, with no obligation to sell, and covers businesses across Melbourne and regional Victoria.

Thinking of selling?

Want to know what buyers would pay for your business? Request your free, confidential business appraisal or call 03 9918 6739.