An appraisal is a structured process in which a trained professional determines the value of an asset to facilitate a financial transaction for business or personal purposes.
What is an 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
How do appraisals work?
An appraisal is often conducted to facilitate business or personal real estate and insurance transactions. It typically consists of three elements:
- A highly structured process for valuing an asset from multiple perspectives
- A trained, certified assessor who is familiar with the asset and the market in which it will be purchased or sold
- A body of professional methods and standards that produce an accurate valuation
The appraisal process assesses all factors that affect an asset’s value, including property and asset value, market value, and potential future earnings.
What is an appraisal in small business insurance?
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.
How do appraisals benefit small business owners?
In additional to helping you choose the right amount of insurance coverage, an appraisal can:
- Ensure that your insurance company indemnifies you properly for your damaged or destroyed property.
- Determine a suitable value for an asset you’re selling so you can decide on a sales price.
- Establish an appropriate sum to offer for an asset you’re buying so you don’t overpay for it.
What is a business valuation or appraisal?
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.
Common business valuation methods
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.
What is a property appraisal in real estate?
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.
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