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What Is a Business Appraiser?

Definition & Examples of Business Appraisers

How Does a Business Appraiser Work?

• Do I Need an Appraiser?

Types of Business Appraisers

Cost of hiring a business appraiser, can i do my own business valuation.

MoMo Productions / Getty Images

In general, an appraiser is someone who assesses the value of a piece of property, particularly to determine a fair sale price. A business appraiser specializes in evaluating tangible and intangible property to determine what a business is worth.

Business owners may need a fair appraisal for many different reasons, from preparing for a sale to making an initial public offering. Any time an owner or prospective buyer needs an unbiased, outsider opinion of the business's value, they would hire a business appraiser. Learn more about what these specialists do and when you might need their help.

All types of property have value, including business property, and the value of that property is best determined by hiring an expert called an appraiser. Appraisers work in all types of situations: 

• A property/real estate appraiser evaluates the value of homes and other real property.
• Some appraisers specialize in certain types of property, such as livestock appraisers and art appraisers.

Regardless of the type of appraiser, they are required to use unbiased methods to provide a fair valuation of the property. Business appraisers are required to operate independently to prepare a business valuation or to value business assets, using financial analysis, physical review, and industry comparisons.

Business appraisers must meet specific standards to achieve what's called Certification in Entity and Intangible Valuations (CEIV). Several organizations offer pathways to this certification, such as the American Society of Appraisers. Appraisers can also be certified/licensed by state regulatory boards for the states in which they practice.

There are several ways to get certified to appraise businesses. Certified Public Accountants, for example, can receive a certification called Accredited in Business Valuation.  

An appraiser can value a business in several different ways. These might include:

• The fair market value method usually considers the value of all equipment, furniture and fixtures, vehicles, and intangible assets. Fair market value is defined as what the property would sell for in an open market, with the price determined by a willing buyer and willing seller.
• A liquidation value assumes that the business has stopped and all assets must be sold quickly. This is the most drastic valuation because it means that the business owner will receive only the minimum value. 
• A capitalization of earnings valuation seeks to determine a company's value today based on its projected future earnings. That is, working backward from a point in the future and using assumptions on how much the earnings will increase from the present. This can also be done in terms of future cash flows.

There are many other ways to value a business, and a trained appraiser will usually use several different valuation methods to come up with a few estimates for a business's value.

The valuation of shares of business stock is different from valuing the business or its assets. This type of valuation typically involves investment bankers, not a business appraiser.

Do I Need a Business Appraiser? 

There are many situations that might necessitate a business appraisal, including:

• Business buying and selling: Before selling a business, many business owners get an appraisal. For an ongoing business, there may be a need for an appraiser in a buy-sell situation, where one of the owners leaves the company. 
• Real estate : Within a business, there may be times when an appraiser is needed to value real estate, for sale or purchase. In this case, a real property appraiser is needed. 
• Business disputes : Appraisers may be needed to value a business within the process of business disputes, such as shareholder disagreements or divorces where the business property is involved.
• Business damages/disaster : An appraiser may be needed to value a business for insurance purposes, after a disaster or other damage to the property and assets. 
• Bankruptcy : The process of business bankruptcy usually includes an appraisal for valuation.

These are just a few examples. A business owner can seek out an appraisal at any time. 

Given the many possible scenarios for a business valuation, there are a variety of different kinds of business appraisers. Some specialize in valuing businesses for sale or for other purposes. Others focus on intellectual property (patents, copyrights, and trademarks) and other intangible assets .

An equipment appraiser, on the other hand, evaluates equipment for sale as part of a business transaction. For example, if a business wants a loan, and pledges specific business assets as collateral for that loan, an appraiser will review the condition of the assets and the fair market value.

The cost of a business appraisal depends on the circumstances. Most appraisers work by the hour, so the size and complexity of the company (the number of assets) play a big part in the cost. According to Mariner Capital Advisers, the cost of a business appraisal can vary from $5,000 to over $30,000.  

If you are looking for an appraiser for your business, check one of the Institute of Business Appraisers and The American Society of Appraisers . Both of these organizations formally accredit business appraisers.

You can run an informal valuation of your small business at any time. However, if you need a valuation for insurance or for selling a business, you will typically need an outside independent appraiser. Likewise, if your business is a corporation or partnership, or if you have multiple subsidiaries or other complex situations, you will definitely need the services of an independent appraiser.

Key Takeaways

• A business appraiser is someone who performs an independent assessment of a business's value.
• Business appraisers can be trained and certified by several different organizations to use unbiased methods to conduct business valuations.
• Business owners can seek an appraisal at any time but do so most often when preparing for a sale or dealing with certain disputes.

Appraisal Institute. " The Appraisal Profession ." Accessed July 17, 2020.

American Society of Appraisers. " CEIV™ Certification ." Accessed July 17, 2020.

American Institute of CPAs. " Credentials ." Accessed July 17, 2020.

U.S. Small Business Administration. " Determining the Value of a Business ." Accessed July 17, 2020.

Mariner Capital Advisors. " 10 Things To Know About Business Valuation ." Accessed July 17, 2020.

What Is A Business Appraisal and Do I Need One?

You know your small business is worth something, but proving it requires a business appraisal conducted by a certified valuation analyst.

Understanding when a business appraisal is necessary and what it can do for your company can help you see future profits and take on transitions with confidence.

What is a Business Appraisal?

A business appraisal, also known as a business valuation, is the process of determining the economic value of a business.

It is conducted by a professional appraiser or valuation expert who thoroughly analyzes the company’s financial statements, assets, liabilities, cash flow, market position, and other relevant factors.

The appraisal process typically involves a detailed analysis of the target company’s financial statements, operations, market position, and other relevant factors of business value. 

The appraiser will also consider factors such as the overall economic environment, market conditions, the company’s competitive environment, and any regulatory or legal issues that may impact the company’s value.

The appraisal report will include a valuation of the target company based on the appraiser’s analysis and a detailed explanation of the valuation methods used and any assumptions or limitations associated with the appraisal. The report may also include recommendations or suggestions for an acquiring company based on the appraisal findings.

When Do I Need an Appraisal?

The purpose of a business appraisal can vary depending on the circumstances, both internal and external factors, but it is often done for the following reasons:

Mergers and Acquisitions

Conducting a merger and acquisition (M&A) business appraisal is essential for businesses looking to engage in M&A activities. It involves a comprehensive analysis of a business’s financial, operational, and market performance to determine its value and potential for growth.

There are several reasons why a serious business owner may conduct an M&A appraisal, including:

• Facilitate M&A Transactions : A thorough appraisal can help businesses identify potential targets for M&A transactions and determine a fair price for the acquisition.
• Assess Business Performance : An M&A appraisal can provide insights into a business’s financial and operational performance, highlighting areas of strength and potential areas for improvement.
• Strategic Planning: An assessment can inform strategic planning efforts by identifying growth opportunities, potential risks, and areas for investment.
• Regulatory Compliance: In some cases, businesses may be required to conduct an appraisal as part of regulatory compliance requirements .

Divorce or Partnership Dissolution

Conducting a business appraisal during a divorce or partnership dissolution can provide a fair and impartial valuation of the business. This process is critical to ensuring that both parties receive an equitable distribution of assets. A business appraisal can also help to identify potential tax implications and guide negotiations between the parties.

During a divorce or partnership dissolution, the business may be one of the most valuable assets that must be divided between the parties. However, valuing a business can be complex, especially if the company has unique assets, intellectual property, or other intangible assets that are difficult to quantify.

A business appraisal can objectively and impartially assess the business’s value, considering its assets, liabilities, financial performance, and other relevant factors.

In addition to helping to ensure a fair and equitable distribution of assets, a business appraisal can also help to make tax considerations and identify potential tax implications. For example, if the business is sold as part of the divorce settlement, there may be capital gains tax implications that need to be considered.

Estate Planning

This business valuation is conducted to determine the value of the business interest for estate planning purposes. 

A business appraisal for estate planning purposes is to determine the fair market value of a business interest. This information is vital for many reasons, including:

• Estate Tax Planning: The value of a business interest is included in the owner’s gross estate for estate tax purposes. Accurately valuing the business interest can minimize potential estate tax liabilities and ensure that the estate plan is structured in the most tax-efficient way possible.
• Asset Allocation: Knowing the value of a business interest can help ensure that the estate plan is structured in a way that allocates assets fairly among beneficiaries.
• Succession Planning: A business appraisal can provide valuable information for succession planning, ensuring that the owner’s interests are protected and that a smooth transition of ownership can occur.
• Buying or Selling a Business Interest: An appraisal is often required when buying or selling a business interest. Understanding the true value of a business interest can help ensure a fair price and prevent either party from being taken advantage of.

You may need a business appraisal for a business loan to provide the lender with an accurate assessment of the value of your business. Lenders use a variety of factors to evaluate loan applications, and the estimated value of your business is an important consideration in their decision-making process.

A business appraisal can help to establish the value of your business and provide the lender with an objective and independent assessment of its worth. This can help to increase your chances of being approved for a loan, as lenders will have greater confidence in the value of the collateral you are offering to secure the loan.

The results of the business appraisal can be used by the lender to determine the loan-to-value ratio of the loan, which is the amount of the loan divided by the appraised value of the collateral.

This ratio is an important factor in determining the risk of the loan and the maximum value and interest rate that the lender will charge.

Internal Management Purposes:

A business appraisal for internal management purposes is a valuation of a business that is conducted to provide information to management. This type of appraisal is typically used by business owners or managers to better understand the value of their business and to make informed decisions about operations, expansion, investment strategy, or exit planning.

The purpose of a business appraisal for internal management purposes is to determine the value of a business interest from an internal perspective. This information is important for business owners for a number of reasons, including:

• Strategic Planning: An appraisal can provide valuable information for strategic planning purposes, helping management to identify areas of strength and weakness and to develop plans to improve performance.
• Investment Decisions: Knowing the business’s value can help management make informed investment decisions, including whether to pursue new projects or acquisitions.
• Exit Planning: An appraisal can provide valuable information for business owners considering selling their business or retiring. Understanding the business’s value can help owners develop an effective exit strategy and maximize the value of their investment.
• Employee Compensation: Knowing the value of the company can help management to develop appropriate and adequate compensation plans for employees, including bonuses, profit-sharing, and equity incentives.

Business Valuation Methods:

The method or combination of methods used to determine business valuation will depend on various factors, including the industry in which the business operates, the company’s financial performance, and the purpose of the valuation.

A professional appraiser or business valuation calculator expert can help determine the most appropriate method for a business valuation calculation in a given situation.

Income approach

The income approach determines the value of a business based on its ability to generate income in the future.

This approach has two primary methods: the discounted cash flow (DCF) method and the capitalization of earnings method.

• The DCF method: Projecting future cash flows and discounting them back to their present value using a discount rate.
• The capitalization of earnings method : Determining a capitalization rate based on the company’s expected future earnings and applying that rate to the company’s current earnings.

Market approach

The market determines the value of a business by comparing it to similar businesses that have been sold recently.

There are two primary methods within this approach: the guideline public company method and the transaction method.

• The guideline public company valuation method : Comparing the company to publicly traded companies in the same industry.
• The transaction method : Comparing the company to similar companies that have been sold in the past.

Asset-Based Method

The asset approach determines the value of a business based on the value of its assets.

There are two primary methods within this approach: the adjusted net asset method and the liquidation value method.

• The adjusted net asset method : Adjusting the value of the company’s assets and liabilities to arrive at a net asset value for small businesses.
• The liquidation value method : Determining the value of the company’s assets if they were sold in a liquidation scenario.

Working with your business coach can help accelerate the process and ease your exit transition. Business valuation and investment advice are critical steps that will help make the best choice for your business. Check out how Catalyst Group ECR can help ! We look forward to hearing from you!

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Business Appraisals: Everything You Need to Know Before Getting One

A business appraisal is the process of valuing your business. If you’re considering hiring an appraiser, here’s what you need to know.

To you, your business is invaluable. 

However, there are many different reasons why a small business owner may need to appraise their business. Whether you’re bringing on a business partner , applying for a loan, or selling, knowing the monetary value of your business can come in handy. 

If you think you may need an appraisal and don’t know where to start, keep reading. We’ll guide you through what you can expect, the process of hiring an appraiser, costs, and other alternatives that could be a better option for you. 

If you’re still planning on running your business after the appraisal, don’t forget to download our guide on how to turn your website into a small business apps to generate steady revenue and growth. 

What is a Business Appraisal? 

An appraisal is the best way to get a fair and unbiased assessment of the value of your business, property, or assets. It requires you to hire a certified professional to conduct a thorough analysis of your business’s economic prospects, property or physical assets, market value, and financials. 

The process of conducting an appraisal varies, however, it’s important to note that all comprehensive appraisals take time—avoid hiring any appraisers that promise a quick turnaround. 

Why Would My Business Need One?

As we mentioned above, there are multiple reasons to hire a business appraiser. Below are some of the most common: 

• Buying or selling a business: An appraisal will help you come up with the dollar amount that both parties feel comfortable with. 
• Buying or selling a business property: Not all businesses have real estate but if you do, you’ll need to hire an appraiser that specializes in real property.  
• Getting divorced: A divorce oftentimes involves the splitting of assets, which can include business properties—especially if you run a family-owned business.  
• Filing for bankruptcy: An appraisal will help with creditor negotiations and preparing a financial restructuring plan. 
• Applying for a loan: Some business loans, such as EIDL loans , require you to use your business or certain parts of your business as collateral. In this case, an appraiser will evaluate those assets. 
• Separating from or bringing on a new partner: Hire an appraiser if you’re looking to settle a dispute with a business partner or draft a buy-sell agreement. 
• Filing an insurance claim: After a natural disaster or damages, an appraiser may be called in by your insurer to determine repair costs. 

How Will My Business Be Valuated 

Depending on your needs, your appraiser will choose the appropriate approach to estimate the value of your businesses. Here are some of the most common ways: 

Market Value 

A market value approach can involve an analysis of your business’s economic performance, such as revenue, profit, and both tangible and intangible assets. It’s then compared to similar businesses in an open market to determine a potential selling price. 

Asset Value

This approach is commonly used when a business is expected to close. It involves subtracting your liabilities from the value of your assets based on their fair market value to obtain your business’s overall appraisal.  

Earning Value

For this approach, appraisers use projected income earnings or cash flow. Based on the method used—such as capitalization of earnings or discounted cash flow—a capitalization or discount rate is applied to those projections. 

Hiring an Appraiser

A good appraiser will be able to determine the best method to evaluate your business and give you an unbiased assessment. Below is what you can expect when looking for and hiring a business appraiser.  

First, it’s important to note that there are a few specializations for appraisers. If you’re looking to appraise your business’s real estate or intellectual property, there are appraisers who specialize in each. If you’re just looking for a general business appraiser, be sure to look for one with experience in your area and industry. 

Hiring an appraiser is not cheap. Unfortunately, many legal proceedings such as divorce or a partner dispute may require it. On average, appraisers charge between $20 to $500 per hour and take 20 to 50 hours to complete an appraisal. 

If your needs aren’t very complex, you may be able to get an appraisal for $1,000. However, the range is typically between $3,000 to $35,000—the figure tends to be on the higher end when litigation is involved. 

When hiring an appraiser, you will first need to discuss the reason why you need a valuation and your main goal. Prepare to go over the financial and operational structure of your business and gather all documentation including financial records, tax returns, payroll, inventory reports, shareholder agreements, lease and loan documents, business plans and projections, etc. 

You’ll then want to verify that you both agree on the scope, timeline, and fee. It’s also good to keep in mind that an appraiser is there to conduct their evaluation fairly and independently—they are not your business’s employee or advocate. 

Doing Your Own Business Valuation

If there aren’t any legal requirements to hire an independent appraiser, you may also choose to do it yourself. Although there’s plenty of room for bias, doing your own valuation is a great way to understand what your business is worth and how to measure it. It also makes for a perfect practice run if you’re planning on selling your business down the line. 

We suggest researching the valuation methods we discussed above in-depth and choosing the one that best suits your goals. Use any knowledge you gain from your own business valuation to help with pitching, negotiating, or growing your business . 

Speaking of growing your business—if you’re ready to transform your website into a revenue-generating, digital storefront , be sure to check out this guide! 

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What is an Appraisal?

Last updated on 3rd May 2023

In this article

The HR magazine The HR Director reports that 65% of HR directors have stated that their performance management process has been put on the back burner over this last year, particularly as the way we worked was completely upended in March 2020. They go on to say that almost half (49%) of employees are not having regular performance conversations with their line managers, but that 67% of managers say they have performance conversations with their teams at least once a month.

Their explanation for the discrepancy in these statistics is that “it could be managers putting a positive spin on their management skills, or they could simply have a looser definition of what constitutes a good performance focused conversation. It is likely that managers are being honest when they say they are speaking to their team members multiple times a week, and in those interactions, they are asking questions such as ‘how is everything going?’ or ‘how are you managing?’. However, do these interactions constitute productive performance conversations and appraisal?”

Research by Breathe HR found that 75% of employees consider personal development to be valuable. Employers were equally positive about its benefits with 72% stating that the appraisal process was valuable, and a third (32%) considering it to be essential. However, only one in five (20%) employees consider their current appraisal process to be motivating and just 19% consider them valuable for their personal development, one in four (25%) say that they don’t seem worth the time, whilst 12% feel that their manager doesn’t seem well prepared for the meeting.

Leadership IQ surveyed 48,012 employees, managers and CEOs to find out what they thought of their annual performance appraisal process; some of the key findings from the study include:

• Only 13% of employees and managers think their organisation’s performance appraisal system is useful.
• Only 6% of CEOs think their performance appraisal process is useful.
• Only 17% of people think their performance appraisals are always open, honest and meaningful.
• Only 22% of people always think that their leader actually distinguishes between high and low performers.
• Only 28% of people believe that their leader always recognises their accomplishments.

Effective performance appraisals are the key to team and individual performance and organisational growth. When carried out effectively, performance appraisals offer positive benefits including improved motivation and better working relationships. When implemented badly, they can, as we can see from the statistics above, have a negative, demotivating effect on all those involved.

What is an appraisal?

Appraisals have long been recognised as an important process which helps both organisations and individuals achieve their goals. An appraisal is a meeting of generally two people, face to face, providing a periodic opportunity for constructive communication between the person who assigns the work and the person who performs it, to discuss what they expect from each other and how well those expectations are being met.

Often now called the performance review, appraisals are a summative evaluation of results achieved, an assessment of future potential and a reflection on effectiveness; in other words, what went well, what didn’t go so well and what can be done to make improvements for the future. The appraisal is at its best when it incorporates elements of assessment, performance management and personal development.

Appraisals should always be:

• Participative – appraisals should be an opportunity for both parties to talk about the appraisee’s career and achievements, to hear feedback from both parties, to reflect on achievements and disappointments and to put forward ideas and plans for the future.
• Fair, valid and evidence based – appraisals should be conducted fairly and consistently by competent and appropriately trained appraisers. They should be based on valid information and assessed against pre-defined standards.
• Supportive and developmental – appraisals should support performance, develop skills, encourage employees and improve the quality of their work, identifying areas of performance where development and change is needed.
• Streamlined and practicable – appraisal systems should seek to minimise the time taken to prepare, participate in the appraisal and complete any documentation. Appraisals should support, not disrupt working practices.

What is the purpose of an appraisal?

Appraisals should hold no surprises, for either the appraisee or the appraiser. Appraisees should never feel that their appraisal puts them under scrutiny or that they are being checked up on. This will only serve to make people dread their appraisal rather than to look at it as an opportunity to have dedicated time to discuss their contribution to the organisation.

It should be a culmination of all the performance discussions that should have taken place throughout the performance period under review. It provides a formal record of what both the appraiser and appraisee have discussed and agreed upon. There may also be a link with a reward review.

Specific objectives for the appraisal should be:

• For the appraiser and appraisee to agree on the level of performance attained during the period under review.
• To identify and discuss both strong and weak aspects of performance.
• To agree on methods of building on the strong and remedying the weak aspects.
• To agree on approaches and methods of training and development.
• To agree on job and personal performance objectives and/or KPIs for the following review period.
• To agree on a plan of action.

Appraisals can benefit both employers and employees by improving job performance, by making it easier to identify strengths and weaknesses and by determining suitability for development. The appraisal is an opportunity to take an overall view of work content, workloads and volume, to look back on what has been achieved during the reporting period and to agree on objectives for the next. Appraisals should also help individuals to understand how their work contributes to the work of the team, and of the wider organisation.

Appraisals can also provide information for human resource planning to assist in, for example, succession planning and to determine the suitability of employees for promotion, for particular types of employment and training. Appraisals can also improve the quality of working relationships and employee engagement by increasing mutual understanding between managers and employees.

If there’s no formal appraisal system in place, managers may neglect to keep on top of how their line reports are doing. This can have implications should a manager need to apply the organisation’s capability or disciplinary procedures because there will be no formal record of managing performance.

Who are appraisals for?

An appraisal should be for everyone employed by the organisation, irrespective of level. An appraisal should provide a chance to stand back and take stock. First and foremost, it should provide the opportunity for praise and the acknowledgement of achievements. It should also help individuals at all levels to understand how their work contributes to the work of the team, and of the organisation. Performance issues can be clarified and addressed, and support and training needs discussed. Individuals’ voices can be heard, within the wider organisation.

Where should an appraisal take place?

There are a number of practicalities to consider when carrying out appraisals. Line managers should ensure that they have given their appraisees enough notice of the appraisal meeting so that they have time to prepare. They must also allocate sufficient time for the meeting and block out the time in their diary, as appraisal meetings should not be deferred or disturbed.

Appraisals should always take place in private; they are confidential meetings and managers should arrange an appropriate meeting place, preferably on business premises. However, there may be circumstances when space is not available in the workplace, so appropriate meeting space should be arranged at an outside venue. They should never take place in an open workspace or in a public place such as a coffee shop.

During the COVID lockdowns many appraisers carried out appraisals via online platforms such as MS Teams or Zoom; however, online meetings have their disadvantages, so wherever possible a private, face-to-face meeting should be arranged.

How often should appraisals happen?

There is no legal requirement for an employer to carry out appraisals, but most employers have a yearly or twice-yearly or quarterly review process, as part of an ongoing performance and talent management process.

If managers are conducting one-to-one performance discussions with their line reports on a frequent and regular basis, then reinforcing this with a more formal meeting carried out either once, twice or four times a year, whichever is appropriate, will ensure that the process has more value for everyone involved, rather than a once a year, tick-box HR exercise. The important thing is that you develop a culture where managers and their people talk to each other regularly about performance and development issues.

What should be included in an appraisal?

The three main things that must be included in a performance appraisal are:

Performance analysis

As a manager, you are tasked with evaluating the performance of employees. A complete analysis should be included in the evaluation so that both of you understand how well the employee measures up to organisational standards.

Employee potential

The potential of every employee must be assessed. This will allow both you and the employee to understand their potential within the organisation. Employees that meet or exceed their objectives may be able to take on more responsibility if the need arises. Assessing employee potential is another means by which an employee will find confidence in their performance and work to even higher standards. By letting an employee know that they have potential for growth within the organisation, their motivation and engagement may be bolstered as a result.

Employee limitations

A performance review must also include the weaknesses of an employee. These will be failings that the employee needs to correct to meet organisational standards. Capability issues are often accompanied by actions which can be taken to help the employee correct these problem areas. Training or assistance may be recommended, and giving precise examples of weaknesses will help your employee correct the issue faster. However, any issues about capability should not come as a surprise to the employee, as these should be addressed as soon as they become apparent through ongoing performance discussions.

How many people should be involved in an appraisal?

The immediate line manager should do the appraisal as they are closest to the job holder’s work, and the appraisal meeting should be a private one-to-one. However, there may be circumstances where others may need to contribute to an appraisal, for example where someone works under a matrix management structure and reports to more than one line manager. In these circumstances, each manager should hold a separate appraisal and feed the information into one appraisal report.

Line managers may elicit and obtain feedback on the line report’s performance from various sources, such as peers, other managers, customers or service users; this is often known as a 360° assessment. However, the appraisal itself should be facilitated only by the individual’s line manager as a private one-to-one meeting.

The appraisal itself should be a full 180° assessment with full participation by both the appraiser and appraisee. The role of the appraiser is to facilitate the appraisal meeting and the role of the appraisee is to fully participate. Both should be open, honest and fair, respecting each other’s views.

Others that will be involved in the appraisal process, but not in the appraisal meeting itself, will generally be:

• The “grandparent” manager – this is the line manager’s line manager. They should be involved to monitor action, check consistency of comments and gain upward information, as well as acting as a line of appeal to ensure fairness and credibility.
• HR – who play an important role in implementing and maintaining performance management systems . HR can help line managers have constructive conversations with employees regarding their performance. Generally, they also collate the completed appraisal reports to use the information for such things as reward, workforce and succession planning, training and development planning etc.

What is the appraisal procedure?

An appraisal is an all-important meeting where a line manager and their line report(s) set aside dedicated time to look at employee performance, review how things have gone over the past year and plan for the year ahead. All managers who carry out appraisals should receive training to help them assess performance effectively and to put that skill into use in the appraisal process. This is particularly important if the organisation is using a rating system for evaluating employee performance. It is crucial that all managers understand the ratings and apply them consistently and fairly.

It is also useful to ensure that appraisees have been fully trained on the organisation’s appraisal process so that they can effectively participate in the process.

Prior to the appraisal meeting, both appraiser and appraisee should prepare by reviewing such things as:

• Job description.
• Current objectives.
• Team objectives.
• Any completed development activities.
• Performance feedback from other sources.

It is useful for appraisees to complete a self-assessment of their performance prior to the meeting so that they are able to participate fully with examples of where things went well, where there were problems, where they might have done things differently having had time to reflect, their aspirations for the future, and any ideas they may have to improve their performance and/or ways of working.

The appraisal meeting should generally follow a structure. The appraising manager should:

• Explain the purpose and scope of the meeting.
• Discuss the job in terms of its objectives and demands.
• Encourage the appraisee to discuss their strengths, successes and areas for development.
• Discuss how far agreed objectives have been met, providing constructive feedback.
• Agree future objectives.
• Discuss any development needs appropriate to the existing job or the individual’s future in the organisation, for example training, education, work experience.

Closing the appraisal meeting, the appraising manager should:

• Summarise what has been discussed and agreed. This should be done positively and enthusiastically.
• Give the employee a chance to react, question and add additional ideas and suggestions.
• Express appreciation for the employee’s participation and reinforce the commitment to future plans.

After the meeting, the appraising manager should:

• Follow up the discussion with a written record of the agreement and/or required action plans.
• Complete the appraisal report and forward it to the appraisee for agreement. If there are any disagreements explain how the employee can appeal against their appraisal outcome.

There are a number of things that should not be included in the performance appraisal. The appraisal procedure should not be:

• Exclusively about pay and reward.
• About specific promotion opportunities.
• A job interview.
• About grievance or disciplinary matters.
• An assertion of authority or judgement.
• A token procedure, “going through the motions” or a tick-box exercise.
• Perceived as unfair or unjust.

Are there any laws about performance appraisal?

Whilst performance appraisal is not a legal requirement for employers, there are some legal considerations that employers should take into account when carrying out performance appraisals.

The Data Protection Act 1998 covers the processing and use of personal information. The Information Commissioner ( ICO ), who is responsible for the enforcement of the Act, has produced four codes of practice to help employers comply with the Act.

• Code 1 covers recruitment and selection.
• Code 2 covers employment records.
• Code 3 covers monitoring at work.
• Code 4 covers information about a worker’s health.

Code of practice 2 on employment records covers computer records and some manual records kept in structured form and this will include records on performance appraisal.

Under the Equalities Act 2010 , appraisers must ensure that they do not discriminate against or treat less favourably any of the nine protected characteristics when carrying out performance appraisals.

Appraisal procedures should not be used as a disciplinary mechanism to deal with unsatisfactory performance. The appraisal form is not the place to record details of verbal or written disciplinary warnings. These should be recorded separately as part of the organisation’s capability and/or disciplinary procedure. This is important should an employee decide to take a case to an employment tribunal .

Final thoughts

It can be extremely valuable to set aside time for a formal appraisal review with each line report, as an appropriate and allocated forum for calm dialogue, reflection and planning. For organisations, having a performance appraisal process ensures that strategic decisions are implemented throughout the organisation, it enhances communication within the organisation and results in a directed, engaged and motivated workforce.

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Megan has worked with CPD Online College since August 2020, she is in charge of content production, as well as planning, managing and delegating tasks. Megan works closely with our writers, voice artists, companies and individuals to create the most appropriate and relevant content as well as also using and managing SEO. She gained her Business Administration Level 3 qualification over the duration of being at CPD Online College as well. Outside of work Megan loves to venture to different places and eateries as well as spending quality time with friends and family.

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Business Plan Evaluation

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What is Business Plan Evaluation?

A business plan evaluation is a critical process that involves the assessment of a business plan to determine its feasibility, viability, and potential for success. This process is crucial for entrepreneurs, investors, and other stakeholders as it helps them make informed decisions about the business. The evaluation process involves analyzing various aspects of the business plan, including the business model, market analysis, financial projections, and management team.

The purpose of a business plan evaluation is to identify strengths and weaknesses in the plan, assess the feasibility of the business idea, evaluate the potential for profitability, and determine the likelihood of achieving the business objectives. The evaluation process also helps identify areas where improvements can be made to enhance the chances of success. This process is particularly important for solopreneurs who are solely responsible for the success or failure of their business.

Importance of Business Plan Evaluation

The evaluation of a business plan is an essential step in the business planning process. It provides an opportunity for the entrepreneur to critically examine their business idea and identify potential challenges and opportunities . The evaluation process also provides valuable insights that can help improve the business plan and increase the chances of success.

For investors, a business plan evaluation is a crucial tool for risk assessment. It allows them to assess the viability of the business idea, the competence of the management team, and the potential for return on investment. This information is vital in making investment decisions.

For Solopreneurs

For solopreneurs, the evaluation of a business plan is particularly important. As they are solely responsible for the success or failure of their business, it is crucial that they thoroughly evaluate their business plan to ensure that it is feasible, viable, and has the potential to be profitable.

The evaluation process can help solopreneurs identify potential challenges and opportunities, assess the feasibility of their business idea, and determine the likelihood of achieving their business objectives. This information can be invaluable in helping them make informed decisions about their business.

For Investors

Investors use the evaluation process to determine whether or not to invest in a business. They look at various aspects of the business plan, including the business model, market analysis, financial projections, and management team, to assess the potential for success. If the evaluation reveals that the business plan is solid and has a high potential for success, the investor may decide to invest in the business.

Components of a Business Plan Evaluation

A business plan evaluation involves the analysis of various components of the business plan. These components include the executive summary, business description, market analysis, organization and management, product line or service, marketing and sales, and financial projections.

Each of these components plays a crucial role in the overall success of the business, and therefore, they must be thoroughly evaluated to ensure that they are realistic, achievable, and aligned with the business objectives.

Executive Summary

The executive summary is the first section of a business plan and provides a brief overview of the business. It includes information about the business concept, the business model, the target market, the competitive advantage, and the financial projections. The executive summary is often the first thing that investors read, and therefore, it must be compelling and persuasive.

In the evaluation process, the executive summary is assessed to determine whether it clearly and concisely presents the business idea and the plan for achieving the business objectives. The evaluator also assesses whether the executive summary is compelling and persuasive enough to attract the attention of investors.

Business Description

The business description provides detailed information about the business. It includes information about the nature of the business, the industry, the business model, the products or services, and the target market. The business description also provides information about the business's competitive advantage and how it plans to achieve its objectives.

In the evaluation process, the business description is assessed to determine whether it provides a clear and comprehensive description of the business. The evaluator also assesses whether the business description clearly outlines the business's competitive advantage and how it plans to achieve its objectives.

Methods of Business Plan Evaluation

There are several methods that can be used to evaluate a business plan. These methods include the SWOT analysis, the feasibility analysis, the competitive analysis, and the financial analysis. Each of these methods provides a different perspective on the business plan and can provide valuable insights into the potential for success.

It's important to note that no single method can provide a complete evaluation of a business plan. Therefore, it's recommended to use a combination of these methods to get a comprehensive understanding of the business plan.

SWOT Analysis

SWOT analysis is a strategic planning tool that is used to identify the strengths, weaknesses, opportunities, and threats related to a business. This method involves examining the internal and external factors that can affect the success of the business.

In the evaluation process, a SWOT analysis can provide valuable insights into the potential for success of the business. It can help identify the strengths and weaknesses of the business plan, as well as the opportunities and threats in the market.

Feasibility Analysis

A feasibility analysis is a process that is used to determine whether a business idea is viable. This method involves assessing the practicality of the business idea and whether it can be successfully implemented.

In the evaluation process, a feasibility analysis can provide valuable insights into the feasibility of the business plan. It can help determine whether the business idea is practical and whether it can be successfully implemented.

In conclusion, a business plan evaluation is a critical process that involves the assessment of a business plan to determine its feasibility, viability, and potential for success. This process is crucial for entrepreneurs, investors, and other stakeholders as it helps them make informed decisions about the business.

The evaluation process involves analyzing various aspects of the business plan, including the business model, market analysis, financial projections, and management team. The purpose of a business plan evaluation is to identify strengths and weaknesses in the plan, assess the feasibility of the business idea, evaluate the potential for profitability, and determine the likelihood of achieving the business objectives.

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What is A Business Appraisal?

Business appraisal: current fair market value of business.

A business appraisal is the means by which businesses may be formally valued in order to determine its current fair market value. Business appraisals may inform the business owner as to the best asking price they should seek before a potential sale, but is often done for other reasons. Formal business appraisals are not necessary when selling the typical small business. Rather, a professional business broker should perform a less formal ‘ business valuation’ (at no cost to the seller) as a part of the listing process.

Purposes of Obtaining Business Appraisals

• Unlike the more conventional (and free) business valuation performed by a business broker prior to listing a business for sale, small business owners typically receive former business appraisals for specific and unique purposes.
• For example, let us say two business partners are having internal turmoil and agree that one partner should buy the other partner out of their half of the business.
• The two business partners may hire a professional such as a Certified Public Accountant (CPA) with an Accredited in Business Valuation (ABV) credential to appraise their business.
• Based on the appraisal of the business, the two partners can then determine the sales price for half of the business.
• Additionally, the court system may order the parties in a judicial proceeding to obtain a business appraisal.
• This may be for the purposes of obtaining the fair market value of a business left to heirs in a will or trust.
• Courts may also use business appraisals to obtain the fair market value of a business for the purposes of awarding one party damages (based on the loss of the business).
• Lastly, the Small Business Administration (SBA) will perform a formal business appraisal of the business before lending money to the business buyer.

Methods of Business Appraisals

Several different methods of appraising businesses exist which are used in different instances by business appraisers. Methods which value the net assets of a business (gross assets minus liabilities on the balance sheet) are not frequently used and should not be used for the vast majority of small businesses (under $10M or so in value). This is because the most important part of a small business is its present and future cash flow, which the net asset method overlooks. The most common business appraisal methods are the Capitalization of Cash Flow (CCF) and the Seller’s Discretionary Earnings (SDE) methods.

The Capitalization of Cash Flow Method of Business Appraisal

The Capitalization of Cash Flow (CCF) method determines the value of a business by dividing the annual cash flow of a business by the capitalization rate. The cash flow may be defined by the EBITDA (Earnings Before Interest, Depreciation, and Amortization) generated by the business. The capitalization rate is the rate of return that the business buyer may expect to receive from their investment. For real estate purchases, a capitalization rate is usually 5-10%. For business purchases, a capitalization rate is much higher (say 25%) because a business lacks the hard assets and safety of real estate. If the cash flow of a business is $100K/year and the capitalization rate is 25%, a business appraisal using a CCF method will determine the business to be worth $400K ($100K/25%).

The Seller’s Discretionary Earnings Method of Business Appraisal

• The Seller’s Discretionary Earnings (SDE) method determines the value of a business by applying a multiple against the adjusted owner benefit that the owner received from the business over the last 12 months.
• It is by far the most common valuation method for small businesses, and is very similar to the standard valuation technique employed by business brokers prior to listing and selling a business.
• The SDE method first determines the annual EBITDA, and then adds back other ‘hidden assets’ or costs that are in fact economic profits derived by the owner of the business.
• These hidden assets includes the owner’s salary , personal expenses that flow through the business, unrecorded cash, and any other expenses that may be viewed as temporary or non-recurring in nature.
• This will then determine the actual owner benefit or SDE of the business.
• The multiple assigned to the SDE will vary based on the growth and longevity of the business, the physical assets of the business, to what extent the owner is absentee, special licenses that come with the business, and a range of other factors.

The Market-Based or ‘Comps’ Method of Business Appraisal

The market-based approach to business appraisal compares sales data from recently sold businesses in an effort to obtain a fair market value for the subject business of the appraisal. It is rarely used in business appraisals, and should almost never solely be used for purposes of valuing businesses. Unlike real estate, businesses are largely comprised of unique intangible assets which change over time . Recent sales data for similar businesses in similar geographic areas may shed light on the fair market value of a business, but the ‘comps’ used may often be misleading. It is also difficult to truly get under the hood and investigate the qualities of a recently sold ‘comps’ because such information will not be publicly available.

Formal business appraisals or less formal business valuations do not have rigid formulas and will be frequently subject to debate. Often the business buyer will argue that the appraisal is too high while the business seller will argue it is too low. It is always best to know both sides of the debate and come up with an appraisal that will be as fair as possible to both sides.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.

What is a Business Appraisal

If you’re operating a successful eCommerce company and you’re getting ready to sell it, the first thing you should consider is how to calculate the businesses’ value on the market. This crucial step is made much simpler if you start with a Business Appraisal.

Getting it done the right way is vital to the success of your sale, at an asking price you’re satisfied with.

A lot of entrepreneurs are not certain how to appraise a business, which is why there should be no guesswork here. Business owners should consider the benefit of reaching out to business appraisal services to ensure the most professional appraisal possible.

If you are moving in the direction of selling your business, a business valuation appraisal is truly a crucial first step.

So, what is a Business Appraisal?

If you’re not sure what your business is worth, don’t try guessing it. It’s important to have your company professionally appraised by a business appraisal service to understand where you stand financially. Once you have that information, whether you decide to sell right away or scale the business first, a Business Valuation Appraisal can help you make better business decisions moving forward.

Sometimes known as either a Business Appraisal or a Business Valuation, it’s the process of determining a valid, accurate estimate of your company’s economic value. There are different methods that can be used to complete this process on either your entire company or individual units within it.

An appraisal for business will evaluate numerous factors to determine the right valuation figure. That valuation method can include looking at your company’s:

• · Financial statements
• · Intellectual property
• · Economic conditions
• · Industry conditions
• · Outstanding debts and liabilities
• · Tangible and intangible assets.

When do you need a Business Appraisal?

There are different reasons why someone would get a Business Appraisal. They include when business owners are:

• · Selling their Business. It becomes much easier to plan the sale of your business once you’ve completed the valuation. It also helps ensure you don’t sell it for less than it’s worth. Understanding your company’s value lets you also understand why prospective buyers are interested in this sale.
• · Planning Your Retirement/Exit. If you’re considering retirement, a Business Appraisal will become a valuable resource for you. That can include handling your estate and succession planning. In fact, planning your future once you’ve retired gets easier when you have a complete financial picture of how your business stands today.
• · Buying a Business . Some buyers request a Business Appraisal as a way to ensure you don’t end up paying an exorbitant amount for a company, a figure that goes above market value.
• · Forming Partnerships. The same is true if you’re looking to buy into a business or have formed a business partnership. This is a smart way to establish an “agreed price” that both parties find acceptable.

Why is it Important to get a Business Appraisal?

The knowledge you get from an accurate Business Appraisal will prove to be highly advantageous in the long term, whether you sell your business or not. It can provide you with significant advantages whenever you begin negotiating deals impacting your company’s financial health, such as securing a business loan or planning a business expansion.

Having a business appraisal can help you make better business decisions in the future. Small business owners operating in the eCommerce and digital space are going to find it particularly useful to know the actual value of your business, something that comes in useful in a variety of business scenarios. That can include:

• · Buying or selling a business
• · Business mergers
• · Securing lender financing
• · Handling Business investments

The fundamentals of a Business Appraisal are designed to help you. Professional appraisers have several primary approaches to evaluating a business’s value. They include:

• · Using market data to compare your business to similar companies that have sold in the past;
• · Reviewing your income, including the current value of your projected future cash flow and your company’s business financial performance
• · Using the sum of all tangible and intangible assets you own to determine your company’s value. This approach assesses the business’s balance sheet to arrive at its value.

An appraiser may use one or a combination of the three to determine the fair market value of your business. If you’re ready to sell your business, an independent appraisal provides you with an objective analysis of the company’s value, which helps you price the company appropriately for a successful sale. The valuation is also used to determine the collateral value of your company when it comes to lender financing.

Get a Business Appraisal Through Website Closers

If you’re ready to get a professional Business Appraisal, start by reaching out to the professional business brokers at Website Closers. Our brokers have years of experience and have sold every conceivable type of online business . We can provide you with a business valuation that will help ensure a successful sale.

The brokers at Website Closers have represented thousands of clients in the sale of their businesses. Our operational background as owners of tech companies gives us a significant advantage when it comes to evaluating and preparing Digital, Tech and internet Companies for a Merger or Acquisition event.

We also understand that every Tech, Internet, Website, and Digital business is different, and it’s important to review the hundreds of variables that differentiate one from the next, to ensure you have the right valuation for your company before it’s ready to sell.

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Business Valuation

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on February 26, 2024

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Table of contents, what is business valuation.

Business valuation is the process of estimating the economic value of a business or its ownership interest which involves taking into account its financial performance, assets, liabilities, and other relevant factors.

Business valuation is crucial for several reasons, including providing an accurate understanding of a company's value, facilitating informed decision-making, and ensuring transparency in financial transactions like mergers and acquisitions, sales, taxation, and legal disputes.

An accurate business valuation can help business owners and investors make strategic decisions about growth, financing, and exit strategies.

Additionally, business valuation is often required for legal purposes, such as taxation, estate planning, and dispute resolution. In these cases, a thorough and accurate valuation can help ensure compliance with legal requirements and protect the interests of all parties involved.

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(936) 899 - 5629

[email protected]

I'm Taylor Kovar, a Certified Financial Planner (CFP), specializing in helping business owners with strategic financial planning.

In my early consulting days, I encountered a family-run bakery facing a difficult decision regarding selling their business. Their uncertainty about the value of their business was compounded by emotional attachments. By conducting a thorough cash flow analysis, we were able to identify and highlight less obvious aspects of value, such as their unique recipes and loyal customer base. Adjusting their valuation to take these intangibles into account, they were able to secure a deal that surpassed their expectations.

Contact me at (936) 899 - 5629 or [email protected] to discuss how we can achieve your financial objectives.

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Methods of Business Valuation

Asset-based approach.

The asset-based approach to business valuation focuses on determining the value of a company based on the value of its tangible and intangible assets .

This approach involves identifying and valuing the company's assets , then deducting its liabilities to arrive at the net asset value . The asset-based approach is particularly useful for companies with significant assets, as well as for those in financial distress or facing liquidation.

However, this approach has its limitations, as it does not take into account the company's future earnings potential or the value of its intangible assets, which may be significant for some businesses.

Income-Based Approach

The income-based approach to business valuation focuses on estimating the company's value based on its ability to generate future cash flows or profits .

This approach involves projecting the company's future earnings, then discounting those earnings to their present value using a discount rate that reflects the risks associated with the company's operations.

The income-based approach is often used for valuing companies with strong growth prospects or those that derive a significant portion of their value from their ability to generate future cash flows.

However, this approach relies heavily on assumptions about future earnings and can be subject to significant uncertainty and subjectivity.

Market-Based Approach

The market-based approach to business valuation estimates the value of a company by comparing it to similar businesses in the market.

This approach involves analyzing comparable companies or transactions to determine valuation multiples, such as price-to-earnings or price-to-sales ratios , which are then applied to the company being valued.

The market-based approach is useful for valuing companies in well-established industries with a large number of comparable businesses or transactions. However, it may not be suitable for companies in niche markets or industries with limited comparables.

Factors Considered in Business Valuation

Revenue and profitability.

Revenue and profitability are critical factors in determining a company's value, as they reflect the company's ability to generate income and maintain sustainable growth.

A company with consistently strong revenue and profitability is likely to be valued more highly than a company with weaker financial performance.

In business valuation, analysts typically review historical financial statements to assess a company's revenue and profitability trends, as well as to identify any anomalies or patterns that may impact the company's value.

Assets and Liabilities

A company's assets and liabilities play a significant role in its valuation , as they represent the resources available to generate income and the obligations that must be met.

Assets, both tangible and intangible, can contribute to a company's overall value, while liabilities can reduce it.

In the valuation process, analysts review a company's balance sheet to identify and value its assets and liabilities, taking into account factors such as depreciation , market conditions, and potential future growth or decline in asset values.

Cash flow is a critical factor in business valuation, as it represents the company's ability to generate cash from its operations, which can be used to fund growth, pay dividends , or meet debt obligations.

A company with strong, consistent cash flows is generally considered more valuable than a company with volatile or weak cash flows.

Analysts typically examine a company's cash flow statement to assess its cash generation and use patterns, as well as to identify any potential issues or opportunities that may impact its value.

Industry and Market Conditions

Industry and market conditions can have a significant impact on a company's value, as they influence factors such as demand for products or services, competitive dynamics, and regulatory environment.

A company operating in a growing industry with strong market demand may be valued more highly than a company in a stagnant or declining industry.

During the valuation process, analysts consider the company's industry and market conditions, as well as any trends or external factors that may influence its future performance and value.

Management and Employee Quality

The quality of a company's management and employees can also impact its value, as it influences the company's ability to execute its strategies, adapt to changes, and maintain a competitive edge.

Companies with strong, experienced management teams and skilled employees are often valued more highly than those with weaker leadership or workforce capabilities.

In business valuation, analysts may assess the company's management and employee quality through factors such as executive and employee backgrounds, turnover rates, and organizational structure .

Intellectual Property and Patents

Intellectual property (IP) and patents can significantly contribute to a company's value, particularly in industries such as technology, pharmaceuticals, or creative sectors, where innovation and unique assets are critical.

Companies with strong IP portfolios or valuable patents are often valued more highly than those with limited or less valuable IP assets.

During the valuation process, analysts may assess the value of a company's IP and patents by considering factors such as the potential future cash flows generated from those assets, the competitive advantages provided, and the remaining life of the patents.

Types of Business Valuation

Fair market value.

Fair market value is a type of business valuation that estimates the price at which a company would change hands between a willing buyer and a willing seller, with both parties having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell.

This is often used in legal contexts, such as taxation and estate planning, as well as for setting transaction prices in business sales or acquisitions .

Investment Value

Investment value is a type of business valuation that estimates the value of a company to a specific investor, taking into account the investor's unique circumstances, objectives, and risk tolerance .

This type of valuation may differ from the fair market value, as it reflects the individual investor's perspective rather than the broader market.

Investment value is often used by investors when evaluating potential investments or determining the value of their existing holdings in a company.

Liquidation Value

Liquidation value is a type of business valuation that estimates the net amount a company would realize if it were to sell its assets and settle its liabilities immediately.

Liquidation value is typically lower than other types of valuation, as it assumes a rapid sale of assets, often at a discount to their fair market value.

This is often used in situations where a company is facing financial distress or bankruptcy and needs to quickly monetize its assets to satisfy its obligations.

Uses of Business Valuation

Sale of business.

Business valuation is essential in the sale of a business, as it provides an objective estimate of the company's worth, which can be used as a basis for negotiating the transaction price.

A thorough and accurate valuation can help business owners ensure they receive a fair price for their company and enable potential buyers to make informed decisions about the investment.

Mergers and Acquisitions

In mergers and acquisitions , business valuation plays a crucial role in determining the value of the target company and assessing the potential benefits and risks of the transaction.

A comprehensive valuation can help acquirers identify synergies, assess the target company's financial health, and determine a fair offer price.

Likewise, for the target company, a thorough valuation can help its owners understand their company's worth and negotiate favorable terms in the transaction.

Taxation and Estate Planning

Business valuation is often required for taxation and estate planning purposes, such as determining the value of a company for tax reporting, gift tax , or inheritance tax purposes.

An accurate valuation ensures compliance with tax regulations and helps business owners and their heirs plan for future tax obligations.

In estate planning , business valuation can also assist business owners in developing succession plans and strategies to preserve and transfer their company's value to future generations.

Litigation and Dispute Resolution

In litigation and dispute resolution, business valuation is often necessary to determine damages, quantify losses, or assess the value of a company in the context of legal disputes, such as shareholder disputes, divorce proceedings, or contractual disputes.

A thorough and accurate business valuation can help parties in a dispute reach a fair resolution and support their legal claims or defenses.

Business Valuation Process

Preparing for valuation.

Before beginning the business valuation process, it is essential to gather all necessary information about the company, including its financial statements , business plan, and other relevant documents.

This information will be used to analyze the company's financial performance , assets, and liabilities, as well as to assess its growth prospects and industry position.

It is also crucial to engage the services of a qualified business valuation professional or firm, who can provide an objective, expert assessment of the company's worth.

Selecting a Valuation Method

Once the necessary information has been gathered, the next step is to select the appropriate valuation method based on the company's characteristics and the purpose of the valuation.

The choice of method will depend on factors such as the company's industry, size, growth prospects, and the availability of comparable transactions or companies.

The selected valuation method should be appropriate for the company's unique circumstances and provide an accurate, objective estimate of its worth.

Collecting and Analyzing Data

After selecting a valuation method, the next step is to collect and analyze the relevant data, such as financial statements, industry reports, and market data.

This analysis will inform the valuation process by providing insights into the company's financial performance, market position, and growth prospects. The data analysis should be thorough and accurate to ensure a reliable valuation.

Applying Discounts and Premiums

In some cases, it may be necessary to apply discounts or premiums to the company's valuation to account for factors such as liquidity , marketability, or control. Discounts and premiums should be applied judiciously, based on objective criteria and supported by empirical evidence.

Finalizing Valuation Report

Once the valuation process is complete, the valuation professional or firm will prepare a comprehensive valuation report that outlines the methodology, data, and assumptions used in the valuation, as well as the final valuation result.

This report should be clear, well-organized, and supported by relevant data and analysis.

The Bottom Line

Business valuation is the process of estimating a company's worth by analyzing its financial performance, assets, liabilities, and other relevant factors. It is essential for various purposes, including sales, mergers and acquisitions, taxation, and legal disputes.

There are several methods of business valuation, including asset-based, income-based, and market-based approaches. Each method has its unique characteristics and is suitable for different situations and types of businesses.

The choice of the valuation method depends on factors such as the company's industry, size, growth prospects, and the availability of comparable transactions or companies.

Various factors are considered in business valuation, including revenue and profitability, assets and liabilities, cash flow, industry and market conditions, management and employee quality, and intellectual property and patents.

Understanding the different valuation methods, factors, and types of valuation can help business owners, investors, and other stakeholders navigate the complex world of business valuation and ensure that they have an accurate, objective assessment of a company's value.

Business Valuation FAQs

What is business valuation.

Business valuation is the process of determining the economic value of a business or company.

What are the methods used in business valuation?

There are three methods used in business valuation: asset-based approach, income-based approach, and market-based approach.

What factors are considered in business valuation?

The financial factors considered in business valuation include revenue and profitability, assets and liabilities, and cash flow. Non-financial factors include industry and market conditions, management and employee quality, and intellectual property.

What are the types of business valuation?

The three types of business valuation are fair market value, investment value, and liquidation value.

What are the uses of business valuation?

Business valuation is used for a variety of purposes, including the sale of a business, merger and acquisition, taxation and estate planning, and litigation and dispute resolution.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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What Is a Business Appraisal and Why Is It Important?

Mar 28, 2022.

Have you ever wondered how much your company would be worth if you sold it right now? The thought may have occurred to you because you’re planning a business expansion or looking to pass on your legacy to the next generation.

Regardless of why you may be considering one, having your company professionally appraised will give you a good idea of where it currently stands financially. This information can be useful in a variety of business scenarios, assisting in the facilitation of better business decisions.

What Is a Business Appraisal?

A business appraisal, also known as a business valuation, refers to the process of determining an accurate and valid estimate of your company’s economic value. This process can be completed on your entire company or individual units of your company. 

Depending on the methods used in the business appraisal, some or all of the following will be evaluated to arrive at a valuation figure: your business’s financials, intellectual property, economic and industry conditions, real estate assets, outstanding debts and liabilities, as well as any other tangible and intangible assets.

Why Are Business Appraisals So Important?

A business appraisal determines today’s resale value of your business. When tracked over time, this knowledge can be advantageous when negotiating deals that may impact your company’s financial health. Timing these events, such as obtaining a business loan or bringing on a new partner, based on an optimal valuation can ensure you end up with the best deal possible. This strategy can also help set the direction for managing internal changes to your company’s structure, such as retirement planning. 

If you’re like many business owners, you may have a rough estimate of how much your company is worth. However, there is no one-size-fits-all way to determine the value of your business, and just like in the stock market, a company’s valuation can change quickly. That’s where business appraisals come in, and certified business appraisals are the gold standard of a business valuation.

The Role of a Business Appraiser: What They Do

A business appraiser is a professional who assesses the worth of a company. They must work independently to prepare a business valuation using physical examination, financial analysis, and industry comparisons. The business appraiser will use their years of experience and strong knowledge base of financial analysis, your company’s industry, and location to determine the market value of your business.

When Do I Need a Business Appraisal?

A business appraisal can almost always be helpful for the owner of a business  because it provides valuable information, but it is essential when you are:

Buying a Business – A business appraisal will assist you in determining an accurate value of the company to be purchased. This ensures that you will not pay an exorbitant amount above market value for the new acquisition.

Selling a Business – A business valuation provides you with the information you need to plan for your sale. Most importantly, that you do not sell your business for less than it is worth. Furthermore, by understanding your company’s value and why it is attractive to potential buyers, you can successfully achieve a higher selling price.

Considering a Partnership Buy-out/ Buy-in – Obtaining a valuation from a neutral party for business transactions is a common way to set an “agreed price” fair to both parties. Because company appraisals are performed objectively, the personal interests of either side of a partnership buy-out/buy-in negotiations do not influence the valuation.

Resolving Legal Disputes – Contract violations, shareholder disagreements, and divorces are significant causes of legal conflicts among businesses. If you find yourself in the middle of a dispute, a court may require a business appraisal to objectively value the business. 

Planning for Retirement/Succession/Exit – A business appraisal can be a valuable resource in your retirement, estate, and succession planning . How do you ensure that there will be enough liquidity to ensure a smooth transition to your heirs or to pay estate taxes? Knowing where your company stands today is the first step toward being able to plan for the future, and a professional business appraisal is the best way to take that first step.

Types of Business Appraisals

Business appraisers use many methods to value a business, but the main three are:

• Asset Value Approach 

In this method, a business value is calculated by totaling the company’s assets then subtracting the company’s liabilities to determine the company’s book value. While this method for the valuation of a company provides a basic estimate, it does not account for earnings, revenue, future growth, and other factors that can greatly influence a company’s value.

• Cash Flow Approach 

This method estimates the value of a business based on its current and projected financial earnings. The most common analysis using this approach is known as a discounted cash flow analysis. This complex valuation utilizes the company’s future cash flow projections and discounts the value of those future cash flows back to today. 

As such, it is more accurate than a simple asset-based valuation, but it does still rely on discretionary factors such as future growth rates and discount rates.

• Market Value Approach 

The market value approach estimates the company’s fair value on the open market based on the recent sales prices of comparable companies in the same sector and geographic region. This approach uses benchmarks such as ratios or multiples from recently transacted market comps to extrapolate an estimated value of your company. 

This method relies on market data, which enhances accuracy and offers simple, easy-to-understand formulas. It doesn’t depend on uncertain cash flow projections or discretionary variables, but it does rely on finding recent and relevant comparable transactions and companies, which can be difficult.

How to Get Your Business Ready for an Appraisal

The most effective way to approach a business appraisal is with honesty. Yes, it may feel uncomfortable to expose all of your company’s inner workings to the scrutiny of another person’s eyes. Still, it is the only way to ensure that the valuation you receive at the end of the day paints the correct picture of your company’s value.

As a result, be prepared to provide information about your company, such as:

• All financial statements from the past three years (balance sheets, income statements, and cash flow statements)
• Detail of physical assets (machinery, buildings, etc.) and intangible assets (goodwill, intellectual property, etc.)
• Detail of all liabilities, especially outstanding loans 
• Any budgets and financial projections for your business, especially any planned non-recurring expenses (CAPEX, expansion plans, new machinery, etc.)
• Any information regarding your industry or competitors that might not be common knowledge 

How Much Does a Business Appraisal Cost?

Because most appraisers charge by the hour, the final cost of having your company appraised will be determined by factors such as the number of assets your company has and its size. It can range from $5,000 to over $30,000.

Given the potentially hefty price tag of a professional appraisal, you may be tempted to conduct an informal assessment of your company. This is good practice for internal purposes, but keep in mind that an internal valuation will have no legal weight. You will need the services of an independent appraiser for this.

Final Thoughts

As a business owner, it is always best to be aware of your options and arm yourself with as much information as possible. The same principle applies when obtaining a business appraisal. Ensure that the appraiser you choose to work with is certified by a relevant organization such as an Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), Certified Business Appraiser (CBA), or Certified Valuation Analyst (CVA), as well as state regulatory boards where they practice.

Then you can rest easy knowing that the comprehensive business valuation report you receive will enable you to confidently take the next business step.

About the Author:

As a Principal at Valesco, Angie Henson serves in key roles related to new investment origination, portfolio management, and investor relations. She directs the firm’s strategic acquisition planning and program management as acting head of research and business development operations since 2002. Angie holds a Bachelor of Science from Tarleton State University and a certificate in entrepreneurial studies from Southern Methodist University.

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A qualified and unbiased expert estimate of an asset’s value

What is an Appraisal?

An appraisal is best defined as an expert’s estimate of the value of “something.” Within the context of business and finance, that “something” is usually an asset (or a group of assets). 

Examples of assets that can be appraised include, but are not limited to:

• Real property (both commercial and residential)
• Equipment (including vehicles)
• Inventory (particularly unique, finished products – as opposed to commodities or raw materials)
• A private business (or a portfolio of private businesses)
• Unique or rare goods (such as fine art, antiques, and jewelry)

An appraisal is conducted by an appraiser; the appraiser is the expert providing the valuation estimate, based on their experience and their training. The valuation estimate, along with supporting documentation, is included in what’s generally referred to as an appraisal report .

• An appraisal is an independent and objective estimate of an asset’s value conducted by an expert with appropriate credentials.
• The appraiser conducting the estimate of value must be completely independent of all other stakeholders in the transaction.
• While there are different “types” of appraisals (depending on the asset being valued), their purpose and their formats tend to be very similar.

Purpose of an Appraisal

Appraisals may be commissioned for a variety of reasons, based on any number of unique circumstances. Broadly speaking, however, these reports are commissioned because one (or more) stakeholders require(s) a fair and unbiased estimate of an asset’s value.

Circumstances that may require an appraisal include:

• To facilitate a transaction involving a specific asset – Both the buyer and the seller need to understand what the asset’s estimated value is to help negotiate a clearing price.
• To secure financing – Particularly credit. Financial institutions generally lend some loan-to-value (LTV) against different asset classes, so they require an estimate of value before extending credit.
• To take out an insurance policy against an asset – Insurance companies cannot assign a policy value to an asset without understanding what the asset is worth or what it would cost to replace.
• For will and estate planning – Families, as well as their lawyers and wealth advisors, may wish to better understand what assets are worth in order to support the division of those assets among beneficiaries.
• “Disputes” – It’s common when shareholders in a private business have some sort of dispute around control of a company; an independent valuation of that business may be required in order to facilitate a buy-out. Divorce and/or separation is a similar justification for seeking the valuation of assets, including a private business (or businesses).
• For tax purposes – An example is if an asset is being donated to a non-profit organization; the “value” of that asset could be tax deductible for the donor, but a fair and objective estimate of value is required. In the US, the Internal Revenue Service (IRS) requires what’s called a Qualified Appraisal in this instance, the standards of which are higher than for most other appraisal circumstances.

Understanding Appraisals

The one common requirement for all appraisals is that the valuation estimate must be completely objective. It’s imperative that the appraiser commissioned to conduct an appraisal be completely independent (sometimes called “arm’s length”) from any of the stakeholders involved, thus permitting them to truly provide a fair, independent, and unbiased opinion of value.

What is Included in an Appraisal Report?

Most appraisal reports usually include the following key sections:

• Cover Page – Introduces the appraiser and their firm, as well as the date the inspection was completed.
• Letter of Transmittal – This section includes who commissioned the appraisal (i.e., the vendor), its intended purpose (i.e.. to facilitate the sale of the asset), as well as who the intended legal user (or users) is/are (i.e., XYZ Bank – to support a financing request).
• Executive Summary – This section usually highlights some of the key findings in a short, single page format. This may include the estimate of value, although without much information about the method(s) used to arrive at the estimate, as well as a brief description of the asset (or assets).
• Asset Description – Whether it’s real property or an equipment asset, this section includes any and all legal identifiers (such as legal addresses and serial numbers). It also features an analysis of the asset, including notes around quality, remaining useful life, specific deficiencies or repairs, and a recent sales history.
• Asset Valuation – This section has much more information around the different types of valuation approaches employed, as well as any comparable properties (or other comparable assets) that have been used to support the analysis.
• Certificate of the Appraiser – This section is where the appraiser’s qualifications are highlighted so stakeholders can cross reference which governing bodies have signed off on their credentials.
• Appendices – It’s common for an appraisal report to have dozens of pages of “addenda” or “appendices.” These have all kinds of supporting documentation like maps, financial statements, information about calculations that were made, and many other types of relevant information that doesn’t fit elsewhere in the report.

As with financial statements, however, there are different “levels” of appraisals that can be commissioned, depending on the needs of the stakeholders involved.

For example, commercial real estate appraisals in the United States can be Restricted Use , Summary , or Self-Contained appraisal reports, with the latter being the most comprehensive (similar to how Compilation , Review , and Audit engagement reports work in Accounting – from least to most comprehensive, respectively).

Types of Appraisals

While almost all appraisal reports will include the above-noted sections, there is some nuance depending on the nature of the asset being valued.

Equipment Appraisals

Equipment appraisals, for example, offer three types of valuation estimates: fair market value (FMV) , orderly liquidation value (OLV), and forced liquidation value (FLV). These different estimates of value may serve unique purposes for different stakeholders.

Real Estate Appraisals

Valuing real estate is itself unique, and there are a few different valuation approaches that can be employed. These are cost , income , and the direct comparison approaches.

Real estate is also interesting because it can’t be picked up and moved, so properties may be subject to certain zoning or land use restrictions. It’s also common that property is acquired with the goal of rezoning and redeveloping it. As such, property appraisals often include what’s referred to as the “highest and best use” of the property (which may not be the same as the site’s current purpose).

Qualified Appraisals

Qualified appraisals are a subset of appraisals that meet certain strict criteria set out by the IRS in the United States. These appraisals are quite rigorous; appraising an asset for tax purposes in the US requires that a “Qualified Appraiser” conduct the analysis and prepare the corresponding report.

Additional Resources

Thank you for reading CFI’s explanation of Appraisal. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• How to Read a Commercial Real Estate Appraisal Course
• Business Valuation Specialist
• Multiple Listing Service (MLS)
• Forced Sale Value
• Valuation Methods
• See all commercial lending resources
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What is a Business Appraiser?

Nov 22, 2022 | Best Business Appraiser , Business Appraiser , Business Valuation

Many individuals wonder what a business appraiser is. And what does a business appraiser do? A business appraiser is an individual who appraises or determines the value of a business. They then proceed to provide a business appraisal or business valuation for the said business.

Definition of a Business Appraiser

A business appraiser is a valuation professional who provides an independent “opinion of value” of a business. A quality business appraiser typically has professional credentials and certifications. This can include business valuation designations and several years of experience valuing businesses. Peak Business Valuation, is an experienced business appraiser in the United States. We focus on providing business appraisals for small businesses. Schedule a free consultation to learn more!

How To Find a Business Appraiser

Finding a business appraiser is less complicated than you might think. Whereas, evaluating the valuation professional may be more difficult. To find a business analyst, you can ask for recommendations from individuals who have used a business appraiser. Or you can simply Google business appraiser or consult with your financial or legal representative. Looking at reviews can help you understand what other individuals’ experiences have been with the business analyst.

Here are a few things to look for when you are finding a business analyst. Ask about their experience. There is no better way to determine the quality of an individual than by speaking with them. A business appraiser should take the time to fully understand your need for a business appraisal, thoroughly explain the process, and at the end of the business valuation, be able to explain how to maximize its use.

As a business analyst, Peak Business Valuation is the most-reviewed and highest-rated business valuation firm in the country. We seek to make sure every client has the best experience. Our vision is to build businesses that thrive. As such, we provide ample resources and education to help you buy , sell , and grow a business that excels. We offer a free consultation to every individual and are happy to answer any questions you might have. If we are not the best fit for your business appraisal needs, we are happy to point you in the right direction. Schedule a free consultation today to get started!

Schedule a Free Consultation!

When to Hire a Business Appraiser

You might be looking for a business analyst or business appraisal for several reasons. Below we discuss a few of the common times when you will need to hire a business appraiser. For questions, schedule a free consultation with Peak Business Valuation, business appraiser.

Business Appraisal for Selling a Business

One of the most important times to obtain a business appraisal is when you plan on selling a business. A business appraisal for selling a business can help determine a fair listing price. It is also a useful tool for maximizing the value of the business prior to a potential sale.

Business Appraisal for Buying a Business

One of the most overlooked times to get a business appraisal is when you are seeking to buy a business. A business appraisal will give you an in-depth look at the company’s financials, assess risk, and highlight opportunities to grow the business. A business appraisal is one of your most valuable tools when negotiating the purchase price of a business. It is also a very important part of the due diligence process when buying a business.

Peak Business Valuation, business appraiser, wants you to feel confident in your business purchase. The valuation process at Peak includes not only the business valuation report but we also take the time to help you understand how to use it during the negotiation process. This is key to determining a fair purchase price , structuring the business transaction, and closing the deal.

Business Appraisal for Growing a Business

Next, are you looking to maximize the value of a business? A business appraisal for growing a business can be just the tool you need. Annual business valuations are like a doctor’s checkup. The business analyst will assess how your business is doing, measure growth, and identify opportunities to focus on. A business appraisal will help you know how to grow your small business most effectively.

Business Appraisal for Transferring Ownership to an Employee or Family Member

Another instance when you may need a business appraisal is when you are transferring ownership. With many small businesses, one of the best buyers for your business is a key employee or family member. When you are looking to transfer ownership or sell ownership a business appraisal is key. For additional information see Transferring Ownership to an Employee. Or check out Transferring Ownership in a Family Business.

Business Appraisal for Tax and Estate Planning

Last, if you own a business, a business appraisal for tax and estate planning is needed for proper tax preparation prior to retirement. While this is less common for Peak Business Valuation, we still provide business appraisals for tax and estate planning. Again, if we aren’t the best fit for your business appraisal needs, we will connect you with a business appraiser who is.

A business appraiser can be an extremely valuable individual if you plan on buying , selling , or growing a business. As such, it is important to know what a business analyst is, when to hire a business analyst, where to find a business analyst, as well as reasons to obtain a business appraisal.   

As a business appraiser, Peak Business Valuation loves helping individuals with business appraisals and business valuations. Small business transactions are our bread and butter. We are here to answer any questions you have about obtaining a business appraisal or finding a business appraiser. Schedule your free consultation today!

Looking to Buy or Sell a Business?

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What are appraisals and are they important for my business?

Appraisals and the need for them are currently a hot topic in and around the business world.  Business leaders are questioning the importance of them. HR Managers are validating the need for them. But are appraisals a thing of the past or a necessary business process?

Whether you are of the thinking appraisals are a process driven, a form-filling activity that takes away creativity and adds more administrative pressure to managers and HR managers, or you think a standardised appraisal system is key to company performance – the importance to get it right, whatever approach you take is fundamental to success.

Even if you are a small, micro business getting the building blocks right to a successful, motivated and objective orientated workforce is key from the moment you hire someone.

You might have a brilliant employer branding strategy, excellent onboarding processes and a strong organisational culture, but does every employee understand their role, their objectives and how they align with the overall strategy and what they need to do to support it?

So what are appraisals?

Performance Appraisals or Performance Reviews as sometimes they are known are an individual plan for each employee. They don’t necessarily need to be resource heavy, paperwork-heavy and an unfavourable process, but they are key.

An appraisal should reflect the employee’s job, their key responsibilities, their wider participation within the team and their overall contribution (or expected contribution) to company-wide business objectives.

Appraisals should focus on performance and personal development with specific areas for employees and employers to concentrate their efforts on above and beyond the day-to-day environment.

Our 7 stage appraisal process breaks it down;

1) what should an appraisal look like.

Appraisals can look like a number of things, an Excel spreadsheet, a word document, or even a hand written piece of paper. More often than not, appraisals now ‘live’ online in the cloud as part of an organisation’s HR system freeing up storage space and keeping information secure (and handy!)

Whatever format you choose, keep it consistent across the business and stick with it!

But what does an appraisal actually look like? What messages? What themes? What headlines?

This is company-specific and again usually designed by the HR department to formalise the process and keep it consistent across the organisation. Even if appraisals are online, messages and key themes need to be organisation-wide but make sure they are specific to your organisation and not a standardised template (all good HR systems with performance management modules should be able to do this!)

For example, an appraisal could have SMART objectives; Specific, Measurable, Assignable, Realistic and Time-Based or it could be less measurable with top line ideas and expectations to be achieved.

Whatever headline messages you choose, whatever KPI’s you want to track, consider the purpose of an appraisal; to manage performance across the business and highlight opportunities for professional, personal development to achieve success.

2) Who should develop an appraisal?

Another healthy debate within the HR world, with HR professionals pushing people managers to be more self-serving, while managers often believe this is the responsibility of the HR department.

As HR departments become more active in business planning, keeping abreast of individual plans isn’t the best use of an HR professional’s time.

It is much better for the employee’s line manager to develop an appraisal with both the HR department, who can give a high level, company-wide objectives and then the employee who will be able to advise on their capability to deliver.

An appraisal, shouldn’t be a rigid document and process with a one type fits all approach (which is it why can’t be something HR are fully responsible for).  An appraisal needs to consider the individual, the manager and the department.  After all you can’t apply the same appraisal document to the receptionist in a hospital to a junior doctor; their key strengths and responsibilities couldn’t be further apart.

3) Who is responsible for an appraisal?

Line managers are ultimately responsible for the appraisal process within their employee management responsibilities.  However, for appraisals to be effective and not a document that sits on a shelf (or in the cloud) for the next 12 months, the appraisal process needs to be collectively owned by the manager, the employee and the HR department.

• The HR department is responsible for standardising the appraisal method, format, tools, information collection and storage across the business.
• The line manager is responsible for understanding the objectives and goals of the department they manage, the individual team members within it, their contribution, their skills and what they individually need to achieve to deliver the objectives of the department.
• The employee, without the employee’s significant input the appraisal process will fall at the first hurdle. The employee needs to feel engaged with the process and understand their personal development is important to the business which feeds through to their performance and the overall performance of the business.

Click here If you want to find out more about how Natural HR’s online HR software can support your business with performance management from HR to self-service

4) When do appraisals take place?

This is a hot topic in HR and business in general with answers ranging from informal day-to-day appraisal reviews to monthly to quarterly to half-yearly to once a year reviews to tick the HR box (or none at all!)

What works for one business, might not work for another and the same applies to your people after all everyone is individual.

One thing we suggest is doing them, and don’t do it once a year to tick the box.  Your people are important assets in your business, ensure they are engaged with your business, ensure they feel empowered to be part of a bigger picture, appraisals provide an opportunity to listen to your employee and listen to their requirements to be able to perform better.

5) Where do appraisals take place?

This is again down to the company, company values and company culture.  Appraisals are ultimately a conversation. Conversations can either be formal and set within a formal environment, or they could be in the local coffee shop.  Wherever you choose, choose somewhere away from the day-to-day environment, away from the wider team and somewhere you can converse clearly and openly.

Another suggestion for appraisals even in the digital world is to do them face-to-face wherever possible.  If you manage remote staff, then face-to-face reviews might not be something you can often do, but wherever you can, appraisals are best approached in person.

6) How long do appraisals have to take and how do you do them?

Again, this depends on the frequency you do them.  If you leave them in the filing cabinet all year, you will have a longer discussion.  The more regular you do appraisals, the easier and quicker they become. If they form part of regular one-to-ones, then there’s no need to diarise monthly appraisal meetings – they could be an additional 15 minutes as part of the regular work in progress catch up. If your organisation has a more formal performance management process, dedicated appraisal times might be required. Whatever frequency you choose, make sure you discuss progress and any barriers to progression. Review the objectives and the KPIs and check whether the objectives set are still valid, especially if appraisals are infrequent.

7) How do you actually deliver appraisals?

‘Doing appraisals’ doesn’t need to be scary. The less you think of appraisals as a ‘doing’ activity, the more they become part of your management style, the easier they become.

In most organisations, especially those with 50 employees or more, HR departments will (or should) deliver an overview of the appraisal process, and offer support to managers to deliver appraisals.

However, there can be tricky appraisals. Not all employees deliver time and time again to the expectations set by the organisation, and delivering negative feedback can be difficult.

Why are appraisals important to my business and why is it important to get right?

To summarise, appraisals are important conversations to align employee’s outputs, performance and personal development with the business strategy.

Appraisals whether formal or informal provide a framework for both employer and employee. A systematic approach to monitoring performance and employee engagement. Whatever process you choose, use good tools around it to support the overall requirements.

Take a look at Natural HR’s performance appraisal module to find out how we could support your appraisal process.

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What Is a Performance Appraisal?

• How It Works

The Bottom Line

Performance appraisals in the workplace: use, types, and criticisms.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Investopedia / Laura Porter

The term “performance appraisal” refers to the regular review of an employee’s job performance and overall contribution to a company. Also known as an annual review, employee appraisal, performance review, or evaluation, a performance appraisal evaluates an employee’s skills, achievements, and growth, or lack thereof.

Companies use performance appraisals to give employees big-picture feedback on their work and to justify pay increases and bonuses, as well as  termination decisions. They can be conducted at any given time but tend to be annual, semiannual, or quarterly.

Key Takeaways

• A performance appraisal is a regular review of an employee’s job performance and contribution to a company.
• Performance appraisals are also called annual reviews, performance reviews or evaluations, or employee appraisals.
• Companies use performance appraisals to determine which employees have contributed the most to the company’s growth, to review their progress, and to reward high-achieving workers.
• Although there are many different kinds of performance reviews, the most common is a top-down review in which a manager reviews their direct report.
• Employees who believe that the evaluation’s construction isn’t reflective of their company’s culture may feel dissatisfied with the appraisal process.

Understanding Performance Appraisals

Performance appraisals are usually designed by human resources (HR) departments as a way for employees to develop in their careers. They provide individuals with feedback on their job performance, ensuring that employees are managing and meeting the goals expected of them and giving them guidance on how to reach those goals if they fall short.

Because companies have a limited pool of funds from which to award incentives, such as raises and  bonuses , performance appraisals help determine how to allocate those funds. They provide a way for companies to determine which employees have contributed the most to the company’s growth so that companies can reward their top-performing employees accordingly.

Performance appraisals also help employees and their managers create a plan for employee development through additional training and increased responsibilities. They help to identify ways that employees can improve and move forward in their careers.

Ideally, the performance appraisal is not the only time during the year that managers and employees communicate about the employee’s contributions. More frequent conversations help keep everyone on the same page, develop stronger relationships between employees and managers, and make annual reviews less stressful.

Types of Performance Appraisals

Most performance appraisals are top-down, meaning that supervisors evaluate their staff with no input from the subject. But there are other types:

• Self-assessment : Individuals rate their job performance and behavior.
• Peer assessment : An individual’s workgroup or co-workers rate their performance.
• 360-degree feedback assessment : Includes input from an individual, supervisor, and peers.
• Negotiated appraisal : This newer trend utilizes a mediator and attempts to moderate the adversarial nature of performance evaluations by allowing the subject to present first. It also focuses on what the individual is doing right before any criticism is given. This structure tends to be useful during conflicts between subordinates and supervisors.

There are many performance appraisal apps that have been developed to help companies automate the evaluation process.

Criticisms of Performance Appraisals

Performance appraisals are designed to motivate employees to reach and/or exceed their goals. But they do come with a lot of criticism.

An issue with performance appraisals is that differentiating individual and organizational performance can be difficult. If the evaluation’s construction doesn’t reflect the culture of a company or organization, it can be detrimental. Employees may report general dissatisfaction with their performance appraisal processes. Other potential issues include:

• Distrust of the appraisal can lead to issues between subordinates and supervisors or a situation in which employees merely tailor their input to please their employer.
• Performance appraisals can lead to the adoption of unreasonable goals that demoralize workers or incentivize them to engage in unethical practices.
• Some labor experts believe that the use of performance appraisals has led to lower use of merit- and  performance-based compensation.
• Performance appraisals may lead to unfair evaluations in which employees are judged not by their accomplishments but by their likability. They can also lead to managers giving underperforming staff a good evaluation to avoid souring their relationship.
• Unreliable raters can introduce a number of biases that skew appraisal results toward preferred characteristics or ones that reflect the rater’s preferences.
• Performance appraisals that work well in one culture or job function may not be useful in another.

What Are Performance Appraisals Used for?

Performance appraisals are used to review the job performance of an employee over some period of time. These reviews are used to highlight both strengths and weaknesses to improve future performance.

What Are the Benefits of a Performance Appraisal?

When executed correctly, performance appraisals can pay off significantly. Among other things, they are capable of boosting employee morale and engagement, clarifying expectations, helping to get the best out of staff, and incentivizing hard work and dedication.

It’s not just companies that benefit, either. Open lines of communication make it easier for employees to raise concerns, express themselves, find their right path, feel appreciated, and be rewarded when they do a good job.

When Should a Performance Appraisal Take Place?

Performance management is an ongoing process. Throughout the year, managers are encouraged to engage with employees to establish goals, note progress, and provide feedback. Formal reviews or appraisals often take place on a yearly or quarterly basis.

What Is a 360-Degree Appraisal?

Standard performance reviews include an employee and their manager or supervisor. The 360-degree version also solicits input from the employee’s colleagues or co-workers.

Communication between employees and their manager or supervisor can be very rewarding. Performance appraisals are capable of boosting morale and output, benefiting all parties.

That’s assuming they go well, though. Sadly, many performance appraisals aren’t executed in the most effective way. In many cases, they may be rushed or simply follow a set framework that perhaps doesn’t always benefit every type of industry or person.

Poorly handled appraisals can be counterproductive. Without a bespoke approach and careful consideration of how to structure meetings and set reasonable targets, the performance appraisal process can have its drawbacks.

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Project Appraisal: Definition, Process, Steps, Tools

by Eric Morkovich · Published October 14, 2011 · Updated December 5, 2023

When an organization wants to find a solution to a particular business problem and identify the best way for implementing that solution, it needs to plan and develop a project that might provide an effective action plan for addressing the problem through implementing the solution.

This organization will need to give an appraisal of the potential project to make sure the project is really effective because it supports the right solution and solves the required problem. In this context, project appraisal management serves as the major process of analyzing and approving the project.

In this article, I am going to write about the project appraisal process and its key steps. I hope my article will help you learn how to evaluate and appraise projects. At the end of the article I give a link to the project appraisal template , which is a more structured way of explaining the appraising process.

What is Project Appraisal? – Definition

Before we talk about the definition of project appraisal, I would like to tell one interesting story from my life. Here’s that story.

Since I’m a PMP and have extensive experience in managing various types of projects, I’ve always wondered how my neighbor, who is a truck driver and therefore not experienced in project assessment management, could do all those “projects” without first assessing and analyzing the initial concept, problem, and solution. By “projects” I mean the activities my neighbor did when he built the garage in his backyard, renovated the kitchen, fixed his truck, even talked to the mailman, and so on. I was amazed that this person had no idea about project evaluation and management, yet he could do successful “projects” without even understanding that they were projects.

One day I took all these thoughts with me and went to my neighbor’s house. I wanted to find out how he had achieved success without using a project, evaluation, or anything else I might consider an evaluation process. When I met him in his renovated kitchen, I was surprised to see that he was making a preliminary plan for his next project: Buying a new car. He was sitting at the small kitchen table, writing something on a large sheet of newspaper (“Daily News”, to be precise). I approached the table and saw many words and sentences underlined and crossed out, with many arrows and circles on the sheet of paper. “What are you doing?” I asked. “Don’t you see? I’m trying to plan my new purchase. Remember that big Mercedes I showed you last month in Truck Driver magazine? I’ve decided to buy it. And now I want to plan everything in advance to avoid failure, you know.”

I sat at the table next to my neighbor and he told me about his plans. I found out that he always made a plan before doing something important or unusual in his daily life, such as building a garage or renovating a kitchen. He never used documents and templates, just a sheet of newspaper, because, as he said with a smile, “newspapers always lie, but my records and plans will make reality more “realistic” and pragmatic” (I still can’t quite understand what he meant).

I’m not going to annoy you by retelling our conversion in this article. I just want to focus you on the key idea behind this story: Often people unwittingly use the methods and techniques of project assessment and evaluation to determine the chances of success of their endeavors. Before I saw in my neighbor’s kitchen how newspapers could be used in the evaluation process, I thought that only formal documents and papers were the tools to evaluate a professional project. But now I know for sure that anyone can do an appraisal; the only thing to remember is that each type of project requires the appropriate level of knowledge and skills to produce a good project appraisal report. And that’s all… Let’s give the definition of project appraisal.

Defining Project Appraisal

Project Appraisal is a consistent process of reviewing a given project and evaluating its content to approve or reject that project by analyzing the problem or need to be addressed by the project, generating solution options ( alternatives ) for solving the problem, selecting the most feasible option, conducting a feasibility analysis of that option, creating the solution statement, and identifying all people and organizations involved with or affected by the project and its expected results. It is an attempt to justify the project through analysis, which is a way to determine the feasibility and cost-effectiveness of the project.

Appraising a project means evaluating the proposed solution for its ability to solve the identified problem or need. Some PM methodologies and guides (e.g., PMBOK) consider technical and financial project appraisal to be part of the initiation or pre-planning phase. PRINCE2 suggests developing the Business Case , which is a form of project formulation and appraisal. Method 123 (MPMM, based on the PMI and PRINCE2 standards) also uses the business case to prepare a proposed project for feasibility analysis and evaluation.

Project Appraisal Management is an essential stage of any project, regardless of its nature, type and size. This stage represents the first point of the pre-planning or initiation phase. Without a project assessment, it is financially and technically unreasonable to proceed with further planning and development. Whether you are buying a new car (e.g. my neighbor’s project), constructing a building, improving a business process, upgrading a network system, conducting a marketing campaign, building a garage, or any other initiative, you should conduct a preliminary assessment and evaluation of your endeavor to ensure that you are making a desired and necessary change in your environment.

Project Appraisal: Key Steps

Different PM methodologies use different approaches and techniques to develop a project appraisal. In my practice, we use a method that views the appraisal process as a series of 4 steps that have a number of sub-steps and tasks. In this checklist you can see the whole hierarchy with the details. I will give an overview of the steps. If you want to go deeper, please read the checklist.

Step #1. Concept Analysis

The first step requires you (as a project appraiser or analyst) to perform a series of analyses to determine the concept of the future project and to present the Decision Package to senior management ( project sponsors ) for approval. This means that you need to perform the problem-solution analysis that determines the problem/need to be addressed and the solution to be used to address the problem.

The solution should be analyzed for cost-effectiveness and feasibility (various project appraisal methods and techniques can be used). You also need to identify stakeholders (the people and organizations involved in or affected by the problem and/or solution) and analyze their needs (how they relate to the problem and/or solution). Finally, you will need to develop a decision package that includes the problem statement, solution proposal, stakeholder list, and funding request. This package is then submitted to the sponsor for approval (or rejection). If the sponsor approves the project concept, you can proceed to the next step.

Step #2. Concept Brief

In this step, you must develop a summary of the project concept to define the goals, objectives, broad scope, duration, and projected costs. All of this data will be used to develop the Concept Brief .

You need to develop a project statement document that specifies the project mission, goals, objectives, and vision. Then you create a broad scope statement that defines the boundaries, deliverables, and requirements of your effort.

Finally, you create a preliminary schedule template that establishes an estimated project duration, and then develop a cost projection document based on cost estimates and calculations.

Step #3. Project Organization

You use the Concept Brief to establish an organizational structure for your project. This structure should be developed and explained in the Project Organization Chart . The document covers issues such as the governance structure (roles and responsibilities), team requirements and composition, implementation approach, performance measures, and other information.

The idea behind the Project Organizational Chart is to create a visual representation of the roles, responsibilities and their relationships, and which people/organizations are assigned to which roles and tasks within the project.

Step #4. Project Approval

The final stage requires you to review all of the previous steps and compile them into a single document called the Project Appraisal . This document summarizes all the estimates and assessments that have been made to justify the project concept and verify that the proposed solution addresses the identified problem.

The financial, cost-benefit, and feasibility analyses will serve as project evaluation methods for project approval. The document is to be submitted to the Snooper stakeholders (the customer, the sponsor ) for review and approval. If the assessment is approved, the project moves to the next phase, planning.

Types of Project Appraisal

Project appraisal uses the following two major types:

• Results oriented appraisal
• Financial appraisals (cost/benefit analysis)

1. Results Orientation

It is carried out at the beginning of a project, before any financial or other material costs are incurred.

Results-oriented project appraisal focuses on identifying and predicting risks and their impact on the achievement of the results foreseen in the project plan and contract. This type of appraisal involves identifying risks based on project management processes such as the initiation process, the planning process, the execution process, and the control process.

Outcome-oriented project assessment also focuses on comparing actual and projected results and ensuring that they are all aligned with the project’s goals and objectives.

2. Financial Appraisal (cost-benefits analysis)

This type of project evaluation is used to determine whether a request for funding (or an investment made) can be justified by the projected savings or revenues after it is completed.

Cost-benefit analysis is a planning tool that helps you determine whether an investment will provide a satisfactory return for your organization. It compares the investment or change with its alternatives according to one or more criteria such as cost, technical factors, services, resource utilization, etc.

Cost-benefit analysis considers all the resources invested in a project and compares them to the expected benefits. The benefits of a project are usually measured against the costs that would have been incurred if the project had not been undertaken.

Under this method, projects with a balance of benefits and costs are accepted, those with an excess of costs over benefits are rejected, and those with an excess of benefits over costs are deferred for further consideration.

In practice, some organizations use a different approach where projects with projected benefit-cost ratios greater than one are accepted, those with ratios between zero and one are borderline for further consideration, and those below zero are rejected before any further investment in plans or work on plans is made.

The Future of Project Management Appraisal

Looking ahead, we can expect several trends to shape the project appraisal landscape.

The use of AI and machine learning in project appraisal is likely to increase, enabling more accurate and efficient appraisals. We can also expect to see a greater emphasis on sustainability in project appraisal, with a greater focus on environmental and social impacts.

Finally, as remote working becomes more prevalent, we can expect to see an increase in the use of digital tools and platforms for project appraisal.

Integrating big data analytics

Big data analytics will play an important role in the future of project evaluation. With the ability to quickly process large amounts of data, big data analytics can provide valuable insights that can improve the accuracy of project evaluations. For example, it can help identify patterns and trends that may affect a project’s viability, such as market fluctuations, consumer behavior, or technological advances. This can lead to more informed decisions and better project outcomes.

Increased Use of Predictive Analytics

Predictive analytics uses historical data to predict future outcomes, and its use in project assessment is likely to increase. By analyzing past project performance, predictive analytics can help predict a project’s success and identify potential risks before they occur. This proactive approach can significantly improve project planning and execution.

Focus on Agile Project Appraisal

As organizations continue to adopt agile methodologies, we can expect to see a shift toward agile project appraisal. This approach emphasizes flexibility, collaboration, and customer satisfaction. Agile project assessment involves continuous evaluation and adaptation throughout the project lifecycle, allowing for rapid response to change and ensuring that the project remains aligned with business objectives.

The Rise of AI-Based Project Appraisal Tools

Artificial Intelligence (AI) is poised to revolutionize project appraisal with the development of AI-powered tools. These tools can automate various aspects of project appraisal, such as data collection, risk assessment, and financial analysis. This not only increases efficiency, but also reduces the potential for human error.

In conclusion, the future of project assessment looks promising, with technological advances paving the way for more accurate, efficient and proactive assessments. As these trends continue to evolve, organizations that adapt and innovate will be better positioned to make informed project decisions and achieve their strategic goals.

Project appraisal might seem daunting, but with the right approach, it can be a powerful tool in your project management arsenal. Remember, the goal is to make informed decisions that steer your project towards success. So, happy appraising!

Link to Project Appraisal Checklist

Tags: initiation steps tips

Eric Morkovich

Eric is an enthusiastic project manager who has worked on various projects in the software industry for over ten years. He took on a variety of roles and responsibilities for projects and teams. Today Eric helps product companies review and improve their software definition, development, and implementation processes. Follow Eric on Twitter .

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Table of Contents

What is a performance appraisal, types of performance appraisals, how performance appraisals work, methods of performance appraisals, what are performance appraisals used for, benefits of performance appraisals, suggested tips and techniques for performance appraisals, criticism of performance appraisals, what are performance appraisals used for, when should a performance appraisal take place, do you want to improve your performance for 2024, what is performance appraisal key concepts explained.

Reviewed and fact-checked by Sayantoni Das

If you’re in business for yourself, running what amounts to a one-person show, it’s safe to say that you will have a good idea of how well you’re doing. However, if your business has anything from 1,000 employees to just one person, there will always be a question of how well they perform. That’s why it’s vital to have an objective means of evaluating employee performance . So today, we’re talking about performance appraisals. 

A performance appraisal is a structured and regular review of an employee's job performance, assessing how well their work aligns with the set job criteria. This process identifies strengths, areas for improvement, and the employee's overall value to the organization, while also planning for future growth and development.

Performance appraisals are also called performance evaluations, performance reviews , development discussions, or employee appraisals.

If you conduct a successful performance appraisal, you can get a handle on what the employee does best and identify areas that require improvement. Appraisals also come in handy for deciding how to fill new positions in the company structure with existing employees.

Performance appraisals can be broken down into four distinct significant types:

1. 360-Degree Appraisal

The manager gathers information on the employee’s performance, typically by questionnaire, from supervisors, co-workers, group members, and self-assessment.

2. Negotiated Appraisal

This type of appraisal uses a mediator to help evaluate the employee’s performance, with a greater emphasis on the better parts of the employee’s performance.

3. Peer Assessment

The team members, workgroup, and co-workers are responsible for rating the employee’s performance.

4. Self-Assessment

The employees rate themselves in categories such as work behavior, attitude, and job performance.

Note that some organizations use several appraisal types during the same review. For instance, a manager could consult with the employee’s peers and assign a self-assessment to the employee. It doesn’t have to be a case of either/or.

Human resources (HR) departments typically create performance appraisals as a tool for employees to advance in their careers. They give people feedback on how well they are doing in their jobs, ensuring that they are managing and achieving the goals set for them and assisting them if they fall short.

Performance evaluations assist in determining how to distribute a company's limited budget for giving out incentives, such as raises and bonuses. In addition, they give businesses a tool to identify the workers who have made the most contributions to their expansion so that they may appropriately reward their top performers.

Performance reviews also assist employees and their managers in identifying areas for improvement and career advancement, as well as in developing a strategy for the employee's development through extra training and more responsibility.

Performance appraisals come in many forms. Managers and human resources staff responsible for these appraisals need to choose the best methods based on the size of their organization and what sorts of responsibilities the employees fulfill.

1. 720-Degree Feedback

You could say that this method doubles what you would get from the 360-degree feedback! The 720-degree feedback method collects information not only from within the organization but also from the outside, from customers, investors, suppliers, and other financial-related groups.

2. The Assessment Center Method

This method consists of exercises conducted at the company's designated assessment center, including computer simulations, discussions, role-playing, and other methods. Employees are evaluated based on communication skills, confidence, emotional intelligence, mental alertness, and administrative abilities. The rater observes the proceedings and then evaluates the employee's performance at the end.

3. Behaviorally Anchored Rating Scale (BARS)

This appraisal measures the employee’s performance by comparing it with specific established behavior examples. Each example has a rating to help collect the data.

4. Checklist Method

This simple method consists of a checklist with a series of questions that have yes/no answers for different traits.

5. Critical Incidents Method

Critical incidents could be good or bad. In either case, the supervisor takes the employee’s critical behavior into account.

6. Customer/Client Reviews

This method fits best for employees who offer goods and services to customers. The manager asks clients and customers for feedback, especially how they perceive the employee and, by extension, the business.

7. Field Review Method

An HR department or corporate office representative conducts the employee's performance evaluation.

8. Forced Choice Method

This method is usually a series of prepared True/False questions.

9. General Performance Appraisal

This method involves continuous interaction between the manager and the employee, including setting goals and seeing how they are met.

10. Human Resource Accounting Method

Alternately called the “accounting method” or “cost accounting method,” this method looks at the monetary value the employee brings to the company. It also includes the company’s cost to retain the employee.

11. Management By Objective (MBO)

This process involves the employee and manager working as a team to identify goals for the former to work on. Once the goals are established, both parties discuss the progress the employee is making to meet those goals. This process concludes with the manager evaluating whether the employee achieved the goal.

12. Performance Tests and Observations

This method consists of an oral test that measures employees' skills and knowledge in their respective fields. Sometimes, the tester poses a challenge to the employee and has them demonstrate their skills in solving the problem.

13. Project Evaluation Review

This method involves appraising team members at the end of every project, not the end of the business year.

14. Rating Scales

These ratings measure dependability, initiative, attitude, etc., ranging from Excellent to Poor or some similar scale. These results are used to calculate the employee's overall performance.

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Performance appraisals serve a dual purpose for both organizations and employees. 

• For organizations: employee assessments provide insight into an employee's contribution, enabling management to improve working conditions, address behavioral issues, recognize employee talents, support skill and career development, and improve strategic decision-making .
• For employees: performance reviews are a way to recognize and thank them for their achievements, find opportunities for promotions or bonuses, help them get training or education to advance their careers, find areas where they can improve, encourage and involve them in their career development, and start conversations about long-term goals.

Performance appraisal also aims to:

• Provide helpful information to help make decisions regarding transfers, promotions, terminations, etc.
• Supply the necessary data to identify employee training and development program requirements.
• Help make confirmation/acceptance decisions regarding employees who have completed a probationary period.
• Help make decisions regarding raising an employee's salary, offering incentives, or changing variable pay.
• Clarify expectations and facilitate communication between managers and subordinates.
• Help employees realize their whole potential performance level.
• Collect relevant employee data and keep the records for various future organizational purposes.

Here is a list of advantages that performance appraisals bring to the table:

• They help supervisors plan promotions for solid, performing employees and dismiss inefficient workers.
• They help the organization decide how to compensate the employees best. Also, companies can use performance appraisal records to help determine extra benefits and allowances.
• They can call attention to employee weaknesses and help set up training programs in-house.
• The performance appraisals can help make changes in the selection process which inevitably help hire better employees.
• Performance reviews effectively communicate the employee's performance status and provide a great way to give feedback on how the employee is doing at their job.
• Performance evaluations are a great motivational tool, providing a snapshot of the employee's efficiency. This snapshot, in turn, can incentivize the individual to improve their performance.

Here are three valuable tips and techniques to maximize the effectiveness of your performance appeals.

• Document your appraisal sessions: Document your employee performance appraisal meetings and store the notes in your go-to database system. By documenting and keeping these notes, you will have easy access when you need them to make decisions about an employee or conduct follow-up meetings.
• Use outlines: Create an outline template to be used for all your company’s performance appraisals. This practice promotes a consistent company-wide review structure and helps employees better prepare for the appraisal meeting.
• Check in with your employees more frequently: Nothing is more dispiriting and frustrating for an employee who performs their jobs in a particular way, only to be told at the end of the year that they’ve been doing it all wrong and it will affect their performance reviews. Teams need to know if they’re doing well and on the right track, so consider conducting performance appraisals at shorter intervals.

Employees are encouraged to meet or surpass their goals through performance reviews. Nonetheless, they are subject to a lot of criticism. 

• Differentiating between individual and organisational performance in performance reviews can be challenging. It can be harmful if an evaluation's design doesn't consider the organisation or company's culture. 
• Performance evaluations can result in adopting unreasonable goals that demoralise employees or encourage them to engage in unethical practices.
• Distrust of the appraisal can lead to problems between subordinates and supervisors or a situation in which employees tailor their input to please their employer.
• According to some labour analysts, the usage of merit- and performance-based pay has decreased due to the use of performance reviews.
• Employees may receive biassed evaluations due to performance reviews focusing more on their likeability than accomplishments.
• Unreliable raters can introduce a number of biases that tilt assessment results towards desired traits or ones that reflect the rater's preferences, which can result in managers giving underperforming personnel a favourable evaluation in order to preserve their connection.
• Performance reviews that are effective for one culture or job function might not be applicable to another.

A performance appraisal has two purposes: to aid the organisation's assessment of the value and productivity that different employees bring and to aid the company’s employees in growing in their respective jobs.

Company Benefit

Employee evaluations can influence an organisation's performance . They enable firms to:

• Identify areas where management may enhance working circumstances in order to raise productivity and work quality. They give insight into how people are contributing.
• Deal with behavioural problems before they affect the efficiency of your department.
• Assist employees in their skills and career development.
• Enhance strategic decision-making in scenarios that call for layoffs, succession planning, or internally filling available posts.
• Motivate employees to contribute more by recognising their talents and skills.

Employee Benefit 

Performance reviews should benefit the employees who get them. The knowledge obtained by evaluating and debating an employee's performance can help you:

• Acknowledge and thank an employee for their accomplishments and contributions.
• Be aware of the chance for a promotion or bonus.
• Recognize and advocate for the need for extra education or training to advance one's profession.
• Identify the precise areas where skills might be strengthened.
• Encourage an employee to feel invested in and active in their professional development.
• A candid discussion of a worker's long-term objectives.

The process of performance management always continues. Managers are urged to meet staff members to set goals, track development, and offer yearly feedback. Although they can be carried out at any time, they usually happen annually, bi-annually, or quarterly.

The more knowledge and skills you possess, the easier it is to deliver an outstanding performance on the job. And, of course, an excellent performance appraisal gets you noticed, promoted, and, most likely, better compensation.

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1. How often should performance appraisals be conducted?

The frequency of performance appraisals can vary depending on organizational practices, industry norms, and the preferences of managers and employees. In many companies, performance appraisals are conducted annually as part of the formal performance management process. However, some organizations may opt for more frequent appraisals, such as quarterly or semi-annually.

2. What are the challenges of performance appraisal?

Some common challenges of performance appraisals include; subjectivity and bias, overemphasis on recent events, time constraints, negative perception, lack of specificity, goal setting and measurement issues, inadequate training for managers, focus on negatives only, link to compensation, and resistance to change.

3. How effective are appraisals?

The effectiveness of performance appraisals can vary based on how well they are designed, implemented, and utilized within an organization. When adequately executed, performance appraisals can be a valuable tool.

4. What are the 5 performance ratings?

While the specific names and descriptions of performance ratings may vary across organizations, a standard five-point scale is as follows:

• Outstanding/Exceeds Expectations
• Above Expectations/Exemplary/Very Good
• Meets Expectations/Proficient/Good
• Needs Improvement/Developing/Partially Meets Expectations
• Unsatisfactory/Does Not Meet Expectations

5. How do I write a good appraisal for myself?

Writing a self-appraisal can be a valuable opportunity to reflect on your performance, achievements, and areas for growth. Here are some tips to help you write a good self-appraisal:

• Start Early
• Review Goals and Objectives
• Be Honest and Objective
• Use Data and Metrics
• Focus on Accomplishments
• Discuss Challenges and Solutions
• Use Positive Language
• Align with Company Values
• Include Learning and Development
• Seek Feedback
• Review your self-appraisal for clarity
• Avoid Overconfidence

6. What not to say in a performance appraisal meeting?

During an appraisal meeting, it's essential to be mindful of what you say to maintain a positive and constructive atmosphere. You should avoid being offensive, excessive self-criticism, gossiping and making excuses, blaming others, and comparing yourself negatively.

7. What if I am unhappy with my appraisal?

If you are unhappy with your appraisal, it's important to handle the situation professionally and constructively. You should take time to reflect, clarify expectations, express your concerns and ask for specific feedback. You can also provide evidence, discuss development plans and seek opportunities for improvement.

8. How do I ask for more hike in performance appraisal?

Asking for a higher hike during the appraisal process requires careful preparation and effective communication. Compile a list of your accomplishments and exceptional performance during the appraisal period. You can also research industry salary benchmarks to understand what is reasonable to ask for. You should also demonstrate how your performance has positively impacted the team, department, or company's success. Keep in mind that not all salary requests may be granted, but having a well-prepared case will increase your chances of a positive outcome.

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Performance Appraisal Planning

There are two key elements which are essential to ensuring effective communication of performance appraisal planning expectations.  They are accurate and current position descriptions, and ongoing two-way communication between the supervisor and the staff member.

Performance Appraisal Planning: Position Descriptions

• Planning:  Position descriptions outline the responsibilities and objectives of a work unit to individual positions.  They can help managers pinpoint staffing gaps or identify over-staffing.  They are valuable in making decisions about realigning or changing organizational structures.
• Recruiting and screening:  Accurate position descriptions provide the basic information about open positions which is required to make a good match between the candidate’s qualifications and the job’s demands.
• Orientation:  Giving a newly hired staff member a position description to review, and then sitting down and discussing it together, serves as an introduction to the job and provides a framework for performance expectations.
• Training and development:  Well-written position descriptions identify the education, experience, and skills required.  They can help staff members pinpoint their own growth areas, and help supervisors tailor appropriate training programs.
• Career ladders:  Accurate position descriptions are a tool in developing upward mobility programs.  A study of position descriptions can reveal the relationships among certain jobs and the knowledge and skills needed to advance from one job to another.
• Position classification:  Position descriptions make it possible to identify job elements, factors and levels, which in turn makes job classification easier.
• Performance appraisal process:  Position descriptions provide the link between the job and appropriate performance expectations.  These performance expectations are a critical factor in evaluating staff members’ performance, determining merit pay increases and evaluating possible readiness for promotion.

A position description should give a clear picture of a position.  It should provide enough detail to accurately communicate the key responsibilities of the position. In deciding which duties and responsibilities will be delegated to individual positions, the supervisor should consider the overall design of the job and the skills and motivations of staff members.  Descriptions should be reviewed, by the staff member and supervisor, and revised as necessary prior to the start of the performance evaluation cycle.  Descriptions serve as the primary tool for building a common understanding of job responsibilities and as the starting point for developing performance objectives and standards.

The supervisor should encourage staff member input in the process to help build staff member commitment to the job and performance level.  The performance appraisal planning expectations (standards) for each of the functions/areas of responsibility should be realistic and measurable.

Performance Appraisal Planning: Developing Goals/Objectives

Clear performance goals make the performance appraisal planning process much easier for both managers and staff members.  They enable supervisors to focus directly on job performance rather than personality.  Staff members and supervisors routinely develop informal performance expectations in answering the questions, “How do we know the job has been done right?” or “How do we measure success?”  Clarifying and communicating these standards by putting them in writing fosters mutual understanding and acceptance.

Pre-Planning

• Identify the purpose(s) of the position. This (these) become(s) the performance goal.
• Examine benefits to be gained, both by the organization and by the staff member.
• Present the goal to the staff member, and then mutually write the development plan to attain the goal.

Writing the Development Plan

• Write the goal statement to indicate what is to be attained and any skills to be developed by the staff member.
• List the action plans to accomplish the goal: Steps to follow, Target dates and checkpoints for review.

Define how you will measure progress.

The method for measuring progress will vary depending on the type of assignment given. Assignments given to management or professional staff members usually require more general results-oriented measurements, while support staff may be more appropriately measured using factors that are concerned with both process and end product.

Performance Appraisal Planning: Definitions of Performance Appraisal Expectations

Performance appraisal planning definitions should be clear, brief, attainable, and measurable. They should be expressed in terms of:

• Quality – how well work must be done in terms of accuracy, appearance completeness, thoroughness, precision, and compliance with professional standards which may have been established for an occupation
• Quantity – how much work must be completed within a given time period.
• Timeliness – when, how soon, within what time period work must be done
• Effective use of Resources – assess the cost/benefits or use of resources such as money,   equipment personnel, time.
• Manner of Performance – describes specific behaviors that have an impact on outcomes such as cooperation and courtesy (sometimes inappropriately referred to as “attitude”)
• Method of Performing work – used if there are rules regarding the methods and  procedures which must be used to accomplish assignments

Performance Appraisal Planning: Avoid Unrealistic Goals

The following guidelines should be considered when writing performance goals with the staff member:

• Use specific examples of behaviors and of the desired results.
• Avoid using evaluative terms which do not describe behaviors and/or outcomes, such as “good work” and “bad attitude.”
• Be wary of using terms such as “always” and “never.”  It may not be realistic to expect that a staff member will always perform perfectly and will never make a mistake.
• Avoid using numbers in goals unless you actually intend to count the behavior (e.g. attendance, production quantities)
• Consider the cost/benefit of gathering information about performance.  As with any other type of information – it costs time and money to gather and maintain.
• Build performance goals which can identify performance above the base line of expected performance.  Staff members want to know how to receive a performance rating which is better than “meets expectations.”

Performance Appraisal Planning: Methods of Verifying Performance

These methods should be determined at the start of the evaluation period and discussed with the staff member.  These may include:

• Direct observation
• Reports of others’ observations
• Written records such as attendance, financial, assignment logs, and status reports
• Results in the form of tangible products

Performance Appraisal Planning: Record Performance Events

To develop a reliable record of events, it is recommended that the supervisor keep informal notes regarding specific performance events throughout the evaluation period.  The staff member should be informed in advance that samples of performance will be recorded.  Listed below are some performance appraisal planning guidelines to follow when recording events:

• Record objective facts concerning actual performance as they occur
• Record only job-related performance, rather than making evaluative statements describing an individual
• Do not try to record every event; rather, select a representative sample of performance in key areas of responsibility
• Cross validate reports from others
• Record both positive and negative performance
• Maintain records on all staff members – not just those that fall in the extremes
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More From Forbes

Kamala harris plan to tax unrealized capital gain is scary, here’s why.

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RALEIGH, NORTH CAROLINA - AUGUST 16: Democratic U.S. presidential candidate Vice President Kamala ... [+] Harris speaks on her policy platform, including improving the cost of living for all Americans, at the Hendrick Center For Automotive Excellence on August 16, 2024 in Raleigh, North Carolina. This is the candidate's first major policy speech since accepting the democratic party nomination.(Photo by Grant Baldwin/Getty Images)

As a presidential candidate, Vice President Harris has piggybacked on many of President Biden’s tax plans, including his pledge not to raise taxes on anyone making under $400,000 a year . But she has plenty of other big plans for your taxes listed here that reprise Biden’s tax goals, with some of her own ideas thrown in.

They include raising top marginal rates on the top earners from 37% to 39.6%. In 2019, she floated a 4% “income-based premium” on households making more than $100,000 to pay for Medicare for All, but this has not yet resurfaced in 2024. Among the more controversial of the Biden proposals—which Harris has repeated—is a tax on unrealized capital gains for taxpayers with wealth greater than $100 million. It may be labeled a “billionaire tax,” though $100 million is a tenth of a billion.

Even so, few may want to defend billionaires (or someone with a mere $100 million for that matter) in the current climate. Some argue this fairly targets extremely wealthy Americans who have taken advantage of tax rules to pay lower rates than their secretaries. For example, wealthy people can tap their resources by borrowing money rather than selling something that would trigger tax. Some attack the proposal as a wealth tax that will chill investments of capital.

Unlike an income tax, Harris’ new wealth tax would work like this. Households worth more than $100 million would pay an annual minimum tax worth 25% of their combined income and unrealized capital gains. Say you purchase stock for $10 a share. It doubles to $20 in the first year, but you still hold it. Even though you haven’t sold it, that $10 gain would be subject to the new tax.

Real estate would work the same way. You buy a house, building, or land. The increase in value over time would be taxed every year, even though you still hold it. We have never had a tax on gains that are not “realized,” meaning sold. In that sense, this new tax would be groundbreaking, a point we’ll come back to.

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Apart from policy, there are administrative issues galore. How do you go about valuing everything every year to be taxed? Public company stock would be straightforward. But most assets could be a nightmare, and who in the end gets to carry the day on value? Disputes about value in tax cases are legendary and voluminous. Nearly every estate tax case with the IRS includes valuation disputes , often with competing experts. In income tax cases, charitable contributions of noncash assets such as real estate or crypto often also end up in major valuation fights.

Just imagine what annual value statements with tax returns might look like, in a world where the increase in value since last year turns into taxes. Capital gains have always been singled out for lower taxes, not higher. And except in the case of estate tax measured on death, it has been nearly sacred not to tax “earnings” you didn’t receive.

Besides, what if value spikes one year, you pay tax, and then it plummets the next year? You still have the now worthless asset and can’t sell it for much. So why the unheard-of shift to tax something before its time?

What is arguably the scariest part of this idea? What if this opens the door to a more generalized effort by the government to tax you on something that you still own? Right now the proposal is only to use this wealth tax for the truly wealthy. Not just billionaires, but also anyone with at least $100 million.

Once we start down this path, could we some years from now face a tax like this for someone with $20 million, $10 million, even $1 million? You get the idea. Even if the “billionaire’s tax” to hit anyone at $100 million passes, there could be court challenges based on what the U.S. Constitution says about the government’s taxing power. The Supreme Court has not fully ruled on a question like this, although one recent guidepost came in a 2024 tax case, Moore vs. USA , in which the Supreme Court upheld a tax on undistributed foreign assets.

The chances of this wealth tax passing may not be high. Harris would need to win, and both the Senate and House would need to be controlled by Democrats. In any event, this proposal could signal the dawn of new taxes and more coming. You can read more about Harris’ big plans for your taxes.

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Harris and Trump Have Housing Ideas. Economists Have Doubts.

The two presidential nominees are talking about their approaches for solving America’s affordability crisis. But would their plans work?

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By Jeanna Smialek and Linda Qiu

America’s gaping shortage of affordable housing has rocketed to the top of voter worry lists and to the forefront of campaign promises, as both the Democratic nominee, Kamala Harris, and the Republican candidate, Donald J. Trump, promise to fix the problem if they are elected.

Their two visions of how to solve America’s affordable housing shortage have little in common, and Ms. Harris’s plan is far more detailed. But they do share one quality: Both have drawn skepticism from outside economists.

Ms. Harris is promising a cocktail of tax cuts meant to spur home construction — which several economists said could help create supply. But she is also floating a $25,000 benefit to help first-time buyers break into the market, which many economists worry could boost demand too much, pushing home prices even higher. And both sets of policies would need to pass in Congress, which would influence their design and feasibility.

Mr. Trump’s plan is garnering even more doubt. He pledges to deport undocumented immigrants, which could cut back temporarily on housing demand but would also most likely cut into the construction work force and eventually limit new housing supply. His other ideas include lowering interest rates, something that he has no direct control over and that is poised to happen anyway.

Economist misgivings about the housing market policy plans underline a somber reality. Few quick fixes are available for an affordable housing shortfall that has been more than 15 years in the making, one that is being worsened by demographic and societal trends. While ambitious promises may sound good in debates and television ads, actual policy attempts to fix the national housing shortfall are likely to prove messy and slow — even if they are sorely needed.

Here’s what the candidates are proposing, and what experts say about those plans.

Harris: Expand Supply Using Tax Credits.

Ms. Harris is promising to increase housing supply by expanding the Low-Income Housing Tax Credit, providing incentives for state and local investment in housing and creating a $40 billion tax credit to make affordable projects economically feasible for builders.

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