Nancy Hyde, The Journal Record
Sep 27, 2023
Your business is likely one of your most valuable assets. When you know the value of your business, you can make better decisions. By monitoring the value, you can increase the marketability of your business over time. Whether you have just begun the journey or are close to the end, it’s good to know how this value is determined.
Your business is likely one of your most valuable assets. When you know the value of your business, you can make better decisions. By monitoring the value, you can increase the marketability of your business over time. Whether you have just begun the journey or are close to the end, it’s good to know how this value is determined.
Valuation methods will differ based upon the reason the valuation is needed. Some of these reasons are:
1. Complete sale of company.
2. Partial sale to outside buyer.
3. Financial investment by outside party.
4. Restructuring company.
5. Buy out of existing partner/shareholder.
6. Divorce or other litigation.
7. Creating an employee stock bonus program.
8. Income and/or estate tax planning for shareholders.
9. Key man insurance and correct amount of insurance needed.
10. Minority ownership decisions-managing several businesses investments.
11. Curious to know your current and potential value.
12. Mergers and acquisitions with your stock.
13. SBA loans.
Value will be based upon whether the business is valued at fair market value, going concern or liquidation. Fair market value is the price agreed upon by a willing buyer and seller, both of whom are knowledgeable and financially capable, without any compulsion to buy or sell, determined at arm’s length and acting in their own self-interest. Going concern value is based upon the value of a business enterprise continuing as an operating business. Liquidation value is the net amount that would be realized if the business terminated and the assets were sold either in an orderly or forced sale.
Let’s start with a comparison of asset sale versus a stock transaction. Most small privately owned businesses are sold as asset sales, larger middle-market transactions involve stock equity sale.
Buyers obtain:
Asset Sale –
a. Inventory.
b. Equipment.
c. Fixtures.
d. Intangible assets.
e. No liabilities.
f. Step up in fixed asset value based upon allocation of purchase price.
Stock Equity Sale –
a. All assets.
b. All liabilities.
c. Buyer takes unknown risks-litigation, product claims, warranties.
d. No step up of basis for fixed assets (in most cases).
Another important reason to know your business value is to work to increase the value over time.
Factors Affecting Value (Healthy Organization = High Value):
1. Revenue is strong and increasing.
2. Business has current and past profitable earnings.
3. Competitive advantage versus others in industry.
4. Industry future is strong and growing.
5. Business relies on key staff in addition to the owner.
6. Systems and processes are in place and documented.
7. Business advisers are consulted on substantial matters.
Approaches that may apply depending upon the industry include market, income, and rules of thumb, as well as asset sale value and stock equity (enterprise) value.
It may be time to discuss your business’s current value and ways to increase the value of your business. It’s good to know what your business is worth.
Nancy Hyde, CPA, is a partner at Arledge, the largest locally owned accounting firm in the Oklahoma City metropolitan area. Arledge is a recognized leader in the accounting industry offering practical solutions in the areas of tax planning, auditing, consulting, accounting advisory services and client accounting.