Asset Valuation Plays Essential Role in Selling Your Business
by Janet Asteroff
You want to sell your business, but sky-high business valuations for technology companies and global market swings seem to focus your attentions away from the basics of the sale.
“Seller be prepared” is a good way to describe importance of the many steps you need to be complete before your business is sold. And few of these steps are more challenging and important to the bottom line than asset valuation. A thorough and positive asset valuation makes your business more attractive to a buyer, and impacts the final price in your favor.
Asset Valuation Explained
Simply put, asset valuation is the process of assigning a monetary value to the things that make up your business – the things the business owns. What are the parts that make your business work and what are they worth – from machinery to real estate to desks to intellectual property – all are assets which make up the ongoing mode of business operation.
Ideally, you should always have a current asset valuation of your business for tax reporting, documenting depreciation schedules and any borrowing based on assets. This works as a general inventory of what your business owns. Large and small companies assign this task to accountants, or special consultants. For a business sale, the seller and buyer use a mutually agreeable method to value the assets, so that the results are an official and undisputed part of the sale.
Some companies ignore a yearly asset valuation completely, and this often means your assets are undervalued later on, which lowers the sale price of the business overall. And, having your assets valued at this late point delays the sale and can result in a smaller price for the overall business.
What’s a Business Asset?
There are two overall categories of business assets: tangible and intangible.
A tangible asset (also referred to as liquid or fixed), can be converted into cash quickly, and the price of selling it has little impact on the value. These can also be current or non-current assets.
Examples of current tangible assets are cash, stocks, government bonds and market accounts. Selling or transferring a tangible asset is easy to do. Non-current assets are those which have been subject to depreciation, and the value of these older assets is decreased (such as computers or equipment). The value of current or older physical goods is easier to determine than the company’s intangible assets since they lend themselves to traditional accounting methods. As a result, they can take up considerable room on the balance sheet.
An intangible asset (also referred to as illiquid), is anything important to your business operations but is not a physical thing. Examples of intangible assets include patents, trademarks, customer lists, intellectual property (IP) and goodwill.
Intellectual property is an asset class in itself. An intangible asset, IP includes intellectual capital, patents, know-how, brands and other results. It has become increasingly important in the last few years, especially for internet-based business. But, if your cleaning store uses technology that keeps inventory and customer lists in the technology “cloud” for storage and processing, that’s an asset that needs to be valued, although it doesn’t have a physical presence.
Goodwill is also an intangible asset, and in today’s economy, it’s an important factor for many businesses. Goodwill is an approximation of the value of a company’s brand name, reputation, customers, technology, or long-term relationships that are not represented financially. Goodwill comes into play when a company buys or acquires another, but pays more than the market value of the company because of the value of goodwill.
Facebook’s recent acquisition of WhatsApp for $19 billion (US), showed considerable goodwill to this small company’s technology. Silicon Valley is littered with acquisitions of small companies with innovative technology, which buyers have valued in the millions and billions because of their potential.
Buying a company at a bargain, or selling it as a loss, is when the seller pays less than the other buyer’s book value. And this is negative goodwill.
As the service economy evolves in a time of increased mobility, you should pay particular attention to businesses with fewer tangible assets and more intangible assets. In a time when anyone can “set up shop” in their home, in almost any part of the globe, with access to fast internet connections, mobile communications and modes of travel, it becomes more and more the case that tangible assets are low, while intangible assets are on the rise, and goodwill can be a determining factor in price.
Defining an Asset Class
As you complete your business asset valuation, keep in mind that for the purposes of investment, the market refers to an “asset class.” This is simply the grouping together of similar investments. But as the business seller, this is one way for you to categorize the overall assets your business has to offer and further help your sale.
The general asset classes are:
- Equities (stocks)
- Fixed Income (debt)
- Cash and cash equivalents
- Real Estate and Commodities.
Intellectual Property has, for some, been recently added as an asset class.
Each asset class is expected to show a different profile risk and return investment distinctiveness, and acts differently in the marketplace.
Asset Valuation Methods
Ultimately, the fair market value of your business is based on the net assets, which is determined by subtracting total liabilities from the company’s total assets.
- The Balance Sheet or Market Value method is based on selling the price of an equivalent item, or the current value in the marketplace. The numbers are arrived at by subtracting against all liabilities of the company
- The Historic Value or Historical Cost is different from the Balance Sheet approach. Historical value uses accounting principles which take into account original price paid, and subsequent depreciation of the asset.
Be comfortable with and know as much as you can about the many facets of valuation. You’ll get the best price for your business the more you know and the better prepared you are for potential buyers. You will find more information in the Business Valuation section of our “Complete Guide to Selling a Business.”
For many businesses, assets help to comprise the overall business value, but for other companies, the assets are valued higher than the business overall.
The Value of Preparation in Selling Your Business
There’s no such thing as being over prepared when you want to sell your business. The more you know about how your business works, what your business owns, its liabilities, customers, and processes will put you in the driver’s seat when it comes to making the deal.
Asset valuation is a critical step in sales preparation. If your business assets are not valued correctly, and in a timely manner, your price will be lower than it should be. As part of your business responsibility, keep your asset valuation up-to-date yearly, know the marketplace, and understand your buyer.