Appraisal

An appraisal is the process of determining the value of an asset for commercial or financial purposes.

Appraisals are commonly used in these three areas:

• Small business insurance
• Business valuation
• Real estate transactions

While appraisals are sometimes used to resolve disputes with insurers, they are also essential for helping small business owners determine the true value of their equipment, inventory, technology, and other property. Knowing the accurate value of your assets ensures your insurance coverage is sufficient to replace them if they're lost, damaged, or destroyed.

Appraisals can be conducted by certified appraisers, online valuation tools, or even through careful documentation and self-assessment. Ultimately, the goal is to ensure your coverage reflects the actual cost to replace your property, preventing gaps in protection.

Small business owners use an insurance appraisal in two ways:

When applying for commercial property insurance or a business owner’s policy. An appraisal can help you choose how much insurance coverage to buy in order to protect your assets. The outcome of the insurance appraisal is a statement of the asset’s total insurable value, which helps an insurer compensate the owner for the cost of replacing the property based on its replacement value.

When challenging an insurer’s damage assessment during the insurance claim-settlement process. Business owners can invoke the appraisal clause in their business owner’s policy or commercial property insurance in cases where they believe an insurer’s damage estimate is too low. The appraisal clause then triggers a nonjudicial process for resolving the dispute.

An appraisal in business is an estimate of the firm’s value that is used to facilitate its purchase or sale. You might also commission a specific property value appraisal when you’re looking to sell or buy an asset such as business real estate or equipment.

Two of the most common business valuation methods are:

Asset-based valuation, which assesses the value of tangible equipment, fixtures, furniture, vehicles, and intangible assets such as goodwill. However, this method understates the value of future earnings potential.

Earnings-multiplier valuation, which predicts future earnings potential, allowing the buyer to calculate return on investment. Also known as a “going concern” valuation, this method is commonly used to value healthy, growing businesses.

A property appraisal is common when buying real estate with a mortgage, refinancing a mortgage, or selling property to anyone using borrowed funds. It assesses whether the selling price is reasonable given the property’s location, condition, and other characteristics.

Mortgage issuers also use appraisals to ensure that their financing does not exceed the property’s market value, which would limit how much it can recover during a foreclosure sale.

Note: A property’s market value is not the same as a tax authority’s assessed value. The market value is what a property might sell for based on local market conditions. The assessed value is the value upon which a tax authority calculates tax liability.

Insureon helps small business owners compare business insurance quotes with one easy online application. Start an application today or speak with a licensed agent about using an appraisal to fully protect your property and save money on your insurance purchase.