Business Valuation vs Broker Appraisal: What Each Is For and When You Need Which

Two documents, two different questions

Owners often treat an appraisal and a valuation as the same thing at different prices. They are not. A broker's appraisal is a sales document. It looks at your business through the eyes of the buyers the broker expects to reach, and suggests an asking price that will attract interest and leave room to negotiate. A good broker brings real knowledge to it: who is buying in your industry right now, what similar listings are asking, how long they are taking to sell.

A valuation is an opinion of market value at a stated date. The valuer normalises earnings, costs the owner's role, chooses a method that suits the business, supports the capitalisation rate or multiple with evidence, and signs a report setting it all out. The valuer has no interest in whether you sell, to whom or for how much. The two can agree, and often they land in a similar place. When they do not, the reasons usually tell you something useful.

Side by side

The table compares the usual form of each document. Individual valuers and brokers vary, so check what you are being offered.

What a broker's appraisal does well

It is worth being fair to appraisals, because they have real value. A broker who sells cafés in the inner north or engineering businesses in the south-east hears every week what buyers are looking for, what they will pay for, and what puts them off. That market feel can be hard to get any other way. A broker can tell you that buyers in your segment want a certain lease length, or that a business with a manager in place will draw more enquiries, or that a particular month is quiet for listings.

An appraisal is also designed for action. It leads into a marketing plan, an information memorandum and a campaign. If you have already decided to sell and want to know where to pitch the asking price, a good broker's appraisal is part of that conversation.

Where an appraisal falls short

The limits come from its purpose. A broker competing for a listing has a reason to suggest a figure that pleases the seller, and a reason to suggest one that sells quickly. Neither is the same as market value. Most appraisals also do not show detailed normalisation, do not cost the owner's role line by line, and do not give evidence for the multiple used.

That matters most when someone other than you has to accept the figure. The ATO says a market valuation must be objective and supported with appropriate evidence, and that valuations by professional valuers are more credible. The SRO's landholder ruling DA-060v2 says the most accurate way to work out the value of land holdings is by valuation from a qualified property valuer, and the business side of the same transaction needs equally supportable figures. An appraisal written to win a listing is not built for that scrutiny, and it was never meant to be.

Which one you need

• ·Setting your own view of value before choosing a broker: a valuation, so you can judge the appraisals you receive.
• ·Choosing an asking price for a sale campaign: a broker's appraisal, ideally tested against a valuation.
• ·A buyout between partners, shareholders or family members: a valuation, because there is no open market sale to rely on.
• ·A transfer between related parties or entities: a valuation, because the agreed price may not be accepted as market value for tax or duty.
• ·Small business CGT concessions or another tax purpose: a valuation, which your accountant then applies.
• ·Landholder duty or a business sold with its land: a property valuation for the land and a business valuation for the rest.
• ·A shareholder or partnership dispute: a valuation, with a separate expert engagement if the matter goes to court.

Using both, in the right order

Many Melbourne owners get the most out of each by doing them in sequence. First, an independent valuation tells you what the business is worth on its current earnings and risks, which adjustments a buyer's accountant is likely to accept, and which issues (a short lease, one dominant customer, the owner doing three jobs) are holding value back. Then you invite brokers to appraise. With a valuation in hand you can see which appraisal is grounded and which is pitched to win your signature, and you can talk to buyers from a position of knowledge.

For smaller sales, Consumer Affairs Victoria says a section 52 vendor statement under the Estate Agents Act 1980 is required for the sale of a small business at a price up to $450,000, setting out financial performance for the last two years and the current year to the most recent quarter. That statement is prepared by the seller and their accountant. A valuation built on the same figures keeps the story consistent. Your lawyer advises on the contract and the disclosure, not the valuer.

• ·Market valuation of assets, Australian Taxation Office
• ·Market valuation for tax purposes (guide), Australian Taxation Office
• ·Revenue Ruling DA-060v2: landholder provisions, valuation of land holdings, State Revenue Office Victoria
• ·Contracts and disclosure statements: estate agents (section 52 vendor statement), Consumer Affairs Victoria

This guide explains how valuations work. It is not tax, duty or legal advice: those positions are for your accountant, lawyer or the relevant regulator.