Business Valuation: Beyond Physical Assets

You may ask yourself what your business is worth, and you might even think it is a simple answer. While you might have an asset rich business where you have a fleet of trucks and a host of computers and other office equipment, but the value of your business goes far beyond these mere physical assets.

The thing is there are essentially three categories of business valuation, and several different valuation methods within each of those. It is by comparing several of them and choosing the method or methods that work for your business that you get a true value. The experts even recommend that you combine these types of valuations, weighting each one with a percentage, and determining a business value that way.

What do these methods look like? Well, to keep things simple here are the three types and generally what they mean.

Asset Approach
The asset approach to business valuation is exactly what it sounds like: you add up the assets of your business both physical and otherwise to come up with a business value. For instance, if you own the building you do business in, the value or the equity in that building if you owe a mortgage on it is what it is worth as an asset. This also includes things like vehicles, equipment, machinery, and other real and intellectual property.

This also includes the value of the inventory you have in stock. The value of these items is related to not only the wholesale costs but the potential profit from their sale.

It’s complicated to actually determine what all of your assets are worth, and you will probably need help to do so.

Income Approach
The income approach talks about the historical income and the potential income of your business. There are a number of ways to figure this out as well. Most business owners figure their income for the greatest tax benefit. These income numbers are not the best to use when selling your business.

This means that two of your primary documents, your income statements and balance sheets must be “recast” to reflect your true income and income potential. Otherwise your business will be undervalued.

Market Approach
This approach is one that looks at your competitors and similar businesses both publicly traded and privately owned to determine what the market in your industry is doing, and therefore helping you to determine the potential income and growth of your business.

For example, if you have been experiencing growth of 10% year over year, and your competitors have been seeing the same or similar numbers, then the growth potential of your business is pretty clear. If there are several variations between you and your competitors, the growth potential may not be as cut and dried, and you may have to look at other market factors to see why you have been outperforming or underperforming in your industry, and what your buyer can expect in the future.

This can be an especially good approach if you are in a growth industry or one that has been booming or if you are in an industry that has been historically steady. You’ll be able to show your buyer that your business will be profitable for years to come.

The most common approach of experts is to combine and weight these different approaches to get a true business value, one that will hold up under buyer scrutiny. Does all of this sound a bit confusing, and do you think you need some help navigating the waters of selling a business? Contact Sunbelt Business Brokers to find an office near you and speak to one of our experts. We will help match you with the most qualified buyer while getting you a fair price for your business at the same time.

Don Pippin Jr, CBI CMSBB
Certified Business Intermediary