Key Insight
A formal valuation and a deal price are different things. The valuation tells you what the business is worth. The deal price tells you what a specific buyer paid on a specific day under specific conditions. They may not match.
The Three Approaches
Income approach: Value based on the business's earnings capacity. For SMBs: SDE multiple or EBITDA multiple (capitalized earnings method). For larger businesses: discounted cash flow. The most commonly applied approach in acquisitions.
Market approach: Value based on comparable transactions — what similar businesses actually sold for. The most widely understood and negotiated approach in the SMB market.
Asset approach: Value based on the net asset value of the business — the fair market value of all assets minus all liabilities. Used primarily for asset-heavy businesses, distressed sales, or as a floor in negotiations.
When a Formal Appraisal Is Required
- SBA loans over a threshold: Most SBA lenders require a formal third-party business valuation (or detailed QoE) when the goodwill component exceeds $250K-$500K
- Estate and gift tax: Business interests transferred as part of an estate plan require IRS-standard FMV appraisals
- Shareholder disputes: Buyouts of minority shareholders often require court-recognized FMV appraisals
- Employee ownership (ESOPs): Required annually
Formal Appraisers
Credentialed business appraisers hold designations from professional associations:
- CVA (Certified Valuation Analyst) — NACVA
- CBA (Certified Business Appraiser) — IACVS
- ABV (Accredited in Business Valuation) — AICPA
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