Is an Appraisal the Same as a Business Valuation?

Our Business Valuation team has performed business valuation services for dozens of entities with their primary asset being real estate. When discussing projects with the owners, our team is frequently asked if a valuation is really needed… couldn’t they just get an appraisal? There is long-standing confusion between an appraisal and a business valuation. In this case, the owner is likely referring to a real estate appraisal of the primary asset of the business. A real estate appraisal is not a substitute for a business valuation, but the confusion is understandable, as there are several similarities.

The Similarities

Similarities between a real estate appraisal and a business valuation include:

• Both are prepared by professionals who have been certified by organizations with a “designation” indicating they have obtained competency in their field of practice, meet continuing professional education requirements, and, in some cases, meet minimum experience requirements. Real estate appraisers typically are certified by the state in which they operate and have a real estate appraiser certificate issued by the state. One real estate certificate offered in Pennsylvania is a “General Appraiser” certificate. A business valuator can also earn a designation attesting to their proficiency. Designations can include CVA – Certified Valuation Analyst; ABV – Accredited in Business Valuation; ASA – Accredited Senior Appraiser; or the CFA – Chartered Financial Analyst.
• Both are prepared by professionals who are subject to oversite standards and regulations including the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP standards are designed to promote and maintain a high level of public trust in appraisal practice by establishing requirements for the real estate appraiser and business valuator to follow.
• Both use three comparable methodologies to determine value. The real estate appraiser can prepare their appraisal using the Comparable Sales Approach, the Cost Approach, and the Income Approach. The business valuator can prepare their report using a Market Approach (similar to the Comparable Sales Approach), an Asset Approach, and an Income Approach.
• Both are subject to reporting requirements based upon the standards and regulations they follow, which govern reporting requirements.

The Differences

Even though there are many similarities, a real estate appraisal is not a business valuation, and a business valuation is not a real estate appraisal. A real estate appraisal determines the market value of a parcel of real estate given specific facts and circumstances detailed in their appraisal report. 100% ownership of the real estate is typically assumed in a real estate appraisal. A business valuation determines the fair market value of an ownership interest in a business given specific facts and circumstances detailed in their valuation report. The ownership interest in a business valuation can be a controlling or non-controlling interest. The experience and skill set required to perform a real estate appraisal is different than the skills and experience required to value a business.

Uses for Both Services

The differences between a real estate appraisal and a business valuation does not mean that they must always stand apart. A real estate appraisal could be relied upon by a business valuator and used to help determine the fair market value of an ownership interest in a business. Once a business ownership wrapper is put around a parcel of real estate, the determination of value for an ownership interest in that business moves from a real estate appraisal to a business valuation. The value is no longer solely dependent on the real estate. The business’s other assets, liabilities, net income, and cash flow must be considered when determining the value of an ownership interest.

The ownership interest in question also impacts value. The business may own 100% of the real estate, but a 100% ownership interest in the business is not the same as a 1% ownership interest. There are different rights and obligations associated with different ownership interests. A controlling 100% ownership interest has different rights than a non-voting or non-controlling interest. These differences must be addressed in a business valuation.

Consider the situation where a business owns a parcel of real estate that is non-operating in nature. A minority owner will not have the right to force the sale of the real estate and receive a share of the proceeds from sale. A controlling ownership interest would have the ability to sell the real estate and receive the proceeds. A minority owner and a controlling owner would look at the value of the real estate asset differently, and the ownership interest in the business for each would be valued differently. There are also different risks associated with the ownership of real estate than with an ownership interest in a business. For example, a risk in a business’s supply chain would not impact a parcel of rental real estate.

A real estate appraisal is often used as part of determining the fair market value of an ownership interest in a business, but the two services and resulting reports are not the same. Each should be performed by properly qualified professionals with the required experience.

You can visit our Business Valuation Services page for more information. Should you have questions about how a real estate appraisal is used in a business, or business valuation questions in general, please don’t hesitate to contact T. Eric Blocher CPA, ASA, CVA.

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