Appraisals, Evaluations, and Valuations

What is the difference between a business appraisal, evaluation, or valuation, and why should you care? The simple answer is they vary as to their intent, purpose, and price.

Appraisals – As a general rule, appraisals are preferred whenever there is litigation or the possibility of litigation or when they are to be relied on by government, the public and/or third parties. Real estate appraisers in Maine must be licensed. Appraisers in other fields can require licensing or at least certification.

The resulting deliverable, or appraisal report, will have a very clear ‘scope of service’ – be it for a lender to determine collateral value for a loan, a court to determine value in a dispute, an estate for reporting to the IRS, or to be an objective report to be relied on between two or more individuals or businesses. Appraisals are often lengthy and costly.

Evaluations – We will limit our discussion to real estate and business. Evaluation is a process of looking either beyond the numbers or the basis for which the numbers are based on. Evaluations require investigation, inspection, interactions, analysis, and a broad understanding of the interrelationships between many variables.

In real estate, that could include location, condition, age, demographics, land use laws, style, obsolescence, construction quality, traffic, neighborhood, encumbrances, leases, and more.

In business, it may require looking at the financial performances, management, customers, the marketing, personnel, policies and procedures, vendors, leases, production, legal issues, trends, accounting, and more.

As you can see the evaluation is not the resulting appraisal, valuation, or price. It is often a process engaged to determine or explain what the price is, or is based on. Additionally, there are evaluations that have no resulting price. They are just a look at these various factors and perhaps a resulting report.

The reason I bring this up, and you should care, is because the result of a good appraisal or valuation is often dependent upon how well the evaluation was performed.

Valuations – Valuations are usually not to be used as evidence in litigation, for interaction with governments, for use for more than one individual or business. Often they are performed by unlicensed or certified individuals.

The price can be delivered in either verbal, report or summary format. It may have a ‘scope of service’ to make it clear the intent and purpose of the valuation. The valuation is the opinion of the person delivering it. That’s why in residential real estate it is sometimes referred to as a ’ Broker Price Opinion’.

One of the most important things to know about a valuation is it’s as good as the person that is delivering it. I’ve seen valuations that are garbage in garbage out. There are on-line valuations that have very little evaluation going into them. On the other end, there are highly trained, experienced individuals, daily involved in the field of which, dare I say, are more in tune to the market than many appraisers. And, the fees, if any, are often less.

If you’re looking for a most probable selling or asking price for your business or commercial real estate, our team at Magnusson Balfour would like to talk to you. Call us today at 207-774-7715.