What Is a Business Appraisal? When You Need One to Sell or Buy

The process of determining what a business is worth. Appraisers typically use several valuation methods — based on assets, profitability, comparable sales, and projected cash flow — the same general approach real estate appraisers use.

Why it matters: For a $1-10M Main Street deal, a formal appraisal usually enters the picture because of financing, not because either party asked for one voluntarily. SBA lenders generally require a third-party appraisal on deals they finance, and the loan amount generally can't exceed the appraised value — so the appraisal can effectively set a ceiling on what a buyer can borrow against, independent of what buyer and seller privately agreed to pay. That makes it worth understanding early, since a seller who prices a business well above what an appraisal is likely to support can end up with a buyer who can't get financing to close at the agreed price. Appraisals also come up in divorces, partnership disputes, and other ownership-change scenarios where a defensible, third-party number matters more than a negotiated one.

Example: A buyer and seller agree on $850,000 for an auto repair shop. If the SBA-ordered appraisal comes back at $720,000, the buyer's loan is generally capped near that figure — meaning the buyer needs to bring more cash to the table, renegotiate price, or the deal stalls.

"Business appraisal" and "business valuation" are usually used interchangeably. One school of thought draws a distinction — an appraisal as an informal pricing guide, a valuation as a more formal figure usable in legal contexts like divorce or ownership disputes — but this distinction isn't universally recognized, so don't assume a counterparty is using the term the same way you are.

Related terms: Multiple, Intangible Assets, Seller's Discretionary Earnings (SDE), Financial Statements