A free appraisal tells you what your business would probably sell for. A formal valuation tells you what it is worth, in a document that survives scrutiny by a court, the ATO or a bank. Most sellers only need the first one. The people who need the second usually have a deadline and a counterparty, not a listing decision.
Work out which side of that line you are on before you pay anyone.
What is the difference between a free appraisal and a formal valuation?
A free appraisal is a market estimate of likely selling price, prepared by a business broker at no cost, based on normalised earnings, an industry multiple and comparable sales. A formal valuation is a paid, documented assessment of fair market value prepared by an accredited valuer under professional standards, and it is the one accepted for legal, tax, financing and dispute purposes.
The difference is not accuracy. A good broker appraisal on a straightforward business is often closer to the eventual sale price than a formal valuation, because the broker is pricing against live buyer demand rather than a methodology. The difference is accountability and admissibility.
Who prepares each, and what it costs
| Broker market appraisal | Formal valuation report | |
|---|---|---|
| Prepared by | Licensed business broker | Accredited valuer, usually a CPA or CA with valuation credentials |
| Governed by | No professional valuation standard | APES 225 Valuation Services |
| Question answered | What would this sell for now? | What is fair market value at a given date? |
| Cost | Usually free | Roughly $5,000 to $30,000, higher for complex or litigated matters |
| Turnaround | Days | Two to six weeks |
| Output | Letter or short report with a price range | Full report with methodology, assumptions and a conclusion of value |
| Accepted by courts, ATO, banks | No | Yes |
| Independent of the sale | No, the broker wants the listing | Yes, independence is required |
The cost spread on formal valuations is mostly about complexity and defensibility, not page count. A single-entity service business with clean accounts sits at the bottom. Anything involving a discounted cash flow, multiple entities, intangibles, minority interest discounts or the prospect of cross-examination sits at the top, because the valuer is pricing the risk of having to defend every assumption in front of someone paid to attack it.
What APES 225 actually requires
Formal business valuations in Australia are governed by APES 225 Valuation Services, the standard issued by the Accounting Professional and Ethical Standards Board. It defines three engagement types, and the one you commission determines what the report is good for.
Valuation engagement. The valuer is free to select and apply whichever approaches, methods and procedures they judge appropriate. This is the full version, and the one to commission when the figure will be scrutinised: litigation, expert witness work, a contested buyout.
Limited scope valuation engagement. The same work with a restriction on it, whether from sparse records, a short deadline, or a client instruction to adopt a particular assumption. The report must disclose the limitation.
Calculation engagement. The valuer and the client agree in advance on the approaches and methods to be used. It is the lightest and cheapest of the three, and it produces a calculated value rather than a conclusion of value.
That distinction matters commercially. Owners sometimes pay for a calculation engagement, assume they have bought a valuation, and then find it does not carry the weight they needed when the argument starts. Ask which engagement type you are being quoted, in writing, and ask what it is not suitable for.
If the valuer is being paid by one party in a dispute and the other party has not agreed to the appointment, expect the report to be challenged on that basis alone. In a contested matter, agree the valuer jointly.
When you need a formal valuation
Pay for the formal report when the number has to be defended rather than achieved:
- Family law proceedings. Property settlements need a valuation that stands up in the Federal Circuit and Family Court, usually from a single expert.
- Shareholder or partnership exits. Especially where the shareholders agreement specifies a valuation method or an independent valuer.
- ATO and CGT purposes. Restructures, trust distributions, and small business CGT concession eligibility tests all turn on values the ATO can review years later.
- Financing. Where a lender requires a certified figure rather than a market opinion.
- Estate and succession planning. Transfers between family members need a defensible arm’s length value.
- Buying into or out of a business at an agreed price. Anywhere the two parties’ interests point in opposite directions.
The pattern is consistent. A formal valuation is for situations with a counterparty. Selling on the open market does not have one yet, which is why an appraisal is usually enough for that purpose.
Do I need a formal valuation to sell my business?
No. To sell a business on the open market, a broker’s market appraisal is generally sufficient, because the sale price is set by buyer demand rather than by a report. A formal valuation becomes necessary when the figure must be defended to a third party such as a court, the ATO, a lender or a co-owner. Sellers are usually better off spending the money on preparing the financials instead.
That last point gets skipped. A $7,000 valuation does not add a dollar to your sale price. Seven thousand dollars spent cleaning up management accounts, documenting the add-backs with evidence, resolving a lease option and reducing customer concentration can add a multiple of that, because those are the things a buyer reprices against during due diligence.
How to read a free appraisal properly
A free appraisal is a genuine professional estimate and it is also a pitch. The broker providing it wants your listing, and the appraised figure is part of how they win it. That is not corruption, it is structure, and the way to handle structure is to account for it rather than complain about it.
Read the assumptions, not the number. Every appraisal rests on a normalised earnings figure and a multiple. Ask for both, separately. An appraisal that gives you a price without showing the earnings base and the multiple applied is not an appraisal, it is a number.
Check the add-backs the broker has accepted. Add-backs are the expenses removed from the P&L to show ongoing earning capacity, like an above-market owner wage or a private vehicle. A broker who accepts every add-back you offer is inflating the base, and a buyer’s accountant will take them straight back out at due diligence. The optimistic appraisal becomes a price reduction three months later, which is the worst possible sequence.
Ask what the multiple is based on. The useful answer names comparable settled sales in your industry and region in the last 12 to 24 months. The weak answer is an industry rule of thumb.
Ask for the range and the assumptions behind each end. A competent appraisal has a low and a high, and the difference between them is a list of specific, fixable things.
Get three. Different brokers will appraise the same business differently, and the spread itself is informative. Take the median, then ask the outlier on each side to justify their position. The broker who can explain why they are low is usually the one who knows the market.
Never choose a broker on the appraisal figure. The highest appraisal is the easiest one to give and the hardest one to deliver, and an overpriced listing goes stale in about 90 days. Once buyers have seen and passed on it, the eventual sale price is lower than if it had been priced correctly to begin with.
The order to do this in
Start with the free appraisals, because they cost nothing and they tell you whether the number is anywhere near what you need. Three appraisals give you a range and a sense of which brokers understand your industry.
If the range works and you are selling on the open market, stop there and spend your money on preparation instead. If the range does not work, you now know exactly how much value you need to build and roughly how long that takes.
Commission the formal valuation only when a specific counterparty needs a defensible figure, and when you do, name the purpose in the engagement letter. A report prepared for a bank and a report prepared for a family law matter are not interchangeable, and the second one costs more for a reason.
Book three appraisals from brokers who actively sell businesses in your industry and city, and ask each of them for the earnings base, the multiple, and the comparable sales behind it. If two of the three answers are vague, you have learned something about your shortlist as well as about your price.