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Step
2 - Business Valuation
How To Do An Asset Based Valuation
The
easiest way to value your business is to use the asset based
valuation method.
Using
this method will probably result in the lowest valuation of
your business- what is often referred to as the liquidation
value.
Some
circumstances that may lead you to use an this type of valuation
are: a new business without a track record, a business that
has been losing money or a business where the owner has recently
died. Or any other circumstance where the owner is forced to
sell or must sell quickly.
Even
if you own a successful, highly profitable business, you should
still conduct an asset based valuation as a way of establishing
a baseline to compare with other valuation methods you will
use.
Conducting
An Asset Based Valuation
The first thing you must do is make a complete list of the
tangible assets owned by your business.
Examples
of tangible assets include: accounts receivable, furniture and
fixtures, equipment, inventory, customer contracts, vehicles,
leasehold improvements, prepaid expenses( paid insurance premiums
for example), franchise agreements.
If
you own the real estate that your business occupies you may
be better off selling it separately from the business, which
means it won't be part of this valuation. But if the business
is dependent on the current location, than add the value of
the real estate in this step.
Next assign a price to each tangible asset based on it's fair
market value.
Fair
market value is what the item can be sold for on the open market.
It may take some research to determine this.
Unless
prices have changed drastically, inventory should be valued
at your cost.
Sometimes
an owner will attempt to value the company's assets based on
book value ( the non-depreciated
value of the item as it is currently valued on your balance
sheet). It is the rare buyer who will pay you book value - they
can buy brand new equipment and vehicles for nearly the same
price as the book value.
So
do your best to assign a value to each item based on what it
can realistically be sold for on the open market. And make sure
to note next to the price why it is worth that amount.
Finally,
make a comprehensive list of the intangible assets owned by
the company.
Examples
of intangible assets: Customer lists, proprietary information
and software, trained and experienced employees and patents,
copyrights trademarks etc.
Come
up with what you consider to be a fair value for each item.
Next, clearly describe the item and explain why you believe
it is worth the amount you're asking.
An
intangible asset that gets a lot of attention is "goodwill".
But Goodwill, in actuality, is just the sum total of all of
your intangible
assets.
Adding
the total of your tangible assets plus the total for your intangible
assets will give you a good idea of what your asking price will
be.
How
To Negotiate The Sale When Using An Asset Based Valuation
The
reality is that you may not find a buyer who is willing to pay
for all your tangible and intangible assets. She likely will
want to pick and choose between them. Also, it is unlikely that
that a buyer will agree to all of the prices you've assigned
to your assets - no matter how conservative you are.
You
should be prepared to negotiate, not just the selling price
of certain assets, but which assets will actually be part of
the sale
This
is why it is so important to take the time to describe your
intangible assets and provide an explanation on all your pricing.
It allows you to set the highest justifiable asking price you
can.
Then,
when the buyer wants to negotiate - and no matter how low you
set your asking price the buyer will want to negotiate - you
will have room to maneuver.
Your
business is worth only what someone will pay for it. The asset
based valuation method is just a way to arrive a reasonable
starting point - once you have a living, breathing buyer in
front of you some negotiating on price will always
need to be done.
By
following the process I've described here, you will set yourself
up to sell your business for the best possible price - even
if that turns out to be less than the amount you arrived at
in your original calculations.
Sell
Your Business Tips, Hints & Techniques:
Enter
your name & e-mail address below and each week I'll send
you detailed tips, facts, resources & ideas you can use
right away to help sell your business faster and for more money.
Next: Valuing
Your Business Based On A Multiple Of Profits
