Valuing your business assets: asset valuation
There are four common methods when valuing your business:
- Asset valuation
- Comparable sales
- Earnings multiple
- Capitalised future earnings
Today, let’s focus on asset valuation as it is the foundation to accurately valuing your business and getting the most out of a potential sale.
The benefit of valuing your business assets
Beyond being fundamental to effectively selling your business or understanding where it sits in regards to its market, valuing your business assets gives you a detailed view of what constitutes your business and what it needs for future growth.
The drawbacks of asset valuation
Asset valuation is a necessary and important part of valuing your business, but it isn’t the only facet of the process. It does not allow you to account for any future income those assets can develop for the business and it does not take into account ‘goodwill’, or the difference between the net value of the assets and the ‘true’ value of a business, which is a more abstract but still valid figure often influenced by the location of a business, its reputation as well as that of the CEO or owner, opportunities for future growth and so on.
Because an asset valuation does not take into account this goodwill or possibility for future growth, it is a method that may not reflect the true value of a business.
What is involved?
In a nutshell? Asset valuation adds the value of your assets and then subtracts the liabilities of the business. What are these liabilities? Most commonly they come in the form of bank debts and payments due/outstanding.
What are the types of assets to value?
There are three types of assets you can value:
- Current/short-term assets
Most common forms of current assets are accounts receivable (money owed to you by clients etc.) inventory and other liquid assets or assets that you can convert into cash within a short period of time.
- Non-current/fixed assets
Non-current assets take the form of, obviously, long-term business assets, such as motor vehicles, tools, equipment (kitchen equipment, computers etc.), buildings and land.
With non-current assets it is necessary to calculate depreciation from the original purchase cost of an item.
- Intangible assets
Goodwill is covered under this heading and as such it is hard to include when valuing your assets. It may be easier to place a value of patents, copyrights, intellectual property and customer lists, as they can be judged in relation to your existing takings and measured against takings prior to having these.
What is goodwill?
Once you have added the value of your various assets, both tangible and intangible, and then subtracted any liabilities, you then have the difference between this figure you a left with and what possibilities your business can bring in regards to future income growth. In some industries, especially service-based businesses such as retail, there is a high and almost visible value in the location of the business, the regularity of returning customers and their relationship with the business owner/employees as well as other valuable resources such as the established practices that allow the business to run smoothly, prioritising growth rather than dealing solely with problems.
If a business is underperforming and that is the reason it sells, then you know it has no goodwill inherent in its value and that you can rely on your assets as an indication of the value of your business.