An appraisal value is an estimation of the worth of property, based on different factors that are known and verifiable. Sometimes referred to as an appraisal market value, this process of evaluating or appraising the value of property may be applied to real estate, a business, or even personal items such as jewelry. The most common application of the term has to do with assessing the ongoing stability of a business, and the viability of continuing current money making ventures, as well as launching new ventures.
One of the key elements of any appraisal value process is to look closely at the projection of future cash flows. This is important for any business, since the ongoing cash flow has a great deal to do with the future existence of the company. Without assessing all relevant factors and finding that the company is likely to enjoy an equitable cash flow, at least during the future period under consideration, there is an increased risk to those who would invest in the business and thus depend on it for generating a return on that investment.
The process of appraisal value generally focuses on three key components. The first of these components is known as the net excess assets. This is simply the total amount of company assets that are available to the shareholders. The assets may include profits earned in previous periods, but not yet distributed, or assets that are set aside to handle shortfalls in cash flow in upcoming periods.
A second common component of appraisal value is the value of inforce business. This refers to the current or present value of the cash flows that shareholders will receive as a result of their investment in the present-day operation of the business. This not only includes cash flow from sales generated, but also earnings on any investments that the company owns, including interest income generated from bank accounts.
The third component necessary to the calculation of an appraisal value is the value of future new business. In order to survive, businesses must constantly be pursuing new customers, with the understanding that in the normal process of competition, some older customers will be lost. The idea is to assess the potential the company exhibits for maintaining current revenue levels, while also attracting enough new business to offset any losses of older customers and actually increase the size and value of the customer base over time.
A company with a positive appraisal value is likely to be financially solvent, capable of maintaining the majority of its current customers, and earning new business from new customers over time. If the business is viewed as likely to lose business due to antiquated production equipment, shifts in the demand for their products, or an inability to compete with companies offering similar goods and services, the appraisal value will show some type of decrease. It should be noted that this type of appraisal often provides data on what is likely to happen if no changes are made in the current mode of operation. For this reason, a company can use the data obtained to create the less than desirable appraisal to make changes and possibly avoid some of the pitfalls that it would encounter otherwise.
