Asset Based Business Valuation: How to Identify Business Assets.
There are several types of business assets you need to consider when you determine your business valuation before a sale. Assets are grouped by usage, convertibility or physical existence, although some accountants may use other classifications.
Current and Fixed Assets (Convertibility)
Current assets can be converted into cash within one year. They include cash, accounts receivable, cash equivalents, marketable securities (treasury bills, bonds, preferred shares, etc.), inventory and prepaid expenses. Current assets are liquid and can be used to pay debt in a timely manner and cover daily business operations.
Fixed assets are tangible assets used to produce goods. They include machinery, computer equipment, furniture and real estate. They aren’t expected to be sold or converted to cash within a year, so they also fall into the non-current/long-term asset category. Machinery and other fixed assets lose value as they age, and the amount of depreciation is indicated on a company’s balance sheet.
Tangible and Intangible Assets (Physical Existence)
Tangible assets are physical assets, including furniture, computers, stock, cash, accounts receivable and buildings. All fixed and current assets are tangible. When tangible assets have a projected life of more than a year, a business can appoint some of the asset’s expense to every useful year instead of expensing the entire asset during the purchase year. This process is called depreciation, and it accounts for wear and tear to an asset as it gets older. The value of furniture, real estate and similar tangible assets is easy to determine by using an appraiser or most recent value from another trusted source.
Intangible assets can’t be seen, touched or felt. Goodwill, patents, trade secrets, copyrights and trademarks are examples of intangible (non-physical) assets. These assets create profit for a company on a continuing basis. Royalties from original music, books, trademarks and patents create a revenue stream for their owners. Copyrights, patents and trademarks exist independently of the company and you can sell or exchange them. Goodwill is part of any business and contributes to its value, but it doesn’t exist separately from the business; therefore, it can’t be sold separately.
It’s difficult to pinpoint an exact value of an intangible asset. A few intangible assets considered of value by the IRS include trademarks, goodwill and human capital (the value of an employee’s skills and knowledge). Certain intangible assets may be amortized as expenses for during their useful lifetimes.
Operating and Non-Operating Assets (Usage)
Operating assets are necessary to conduct business on a daily basis. They aren’t sold to customers and may be fixed or intangible. Property, equipment, land, a manufacturing plant, driveways, furniture and vehicles are examples of fixed operating assets. Intangible operating assets include trademarks, trade secrets, patents and copyrights.
Non-operating (or redundant) assets aren’t necessary to operate a business, but they may provide income. They are listed on a company’s balance sheet along with operating assets. Redundant assets are sometimes used as a backup in case a business needs to diversify or add new income sources.
The Asset-Based Approach to Business Valuation
An asset-based approach to business valuation is the total value of tangible and intangible assets, and considers the assets’ resale value during calculation. Total liabilities are subtracted from the total asset value to arrive at the end result. When using this method, the business owner has some discretion as to what assets to add to the total and what to ignore. The asset-based approach may be problematic for some companies due to difficulty determining the worth of patents, intellectual property and other intangible assets.
Correct evaluation of assets is essential to calculate your business’s selling price. Once your accountant has compiled all financial reports, hire an experienced business broker can help you set an accurate business valuation. Contact on today calling 1-800-Biz-Broker. They can help get your business sold fast!