Asset Evaluations that support your wealth…
As we’ve pointed out, starting and building a small business is one way of rapidly growing your personal wealth.
Other than the personal cash flow you derive from your business – the value of the business becomes “real” once you have converted it from a held asset into a medium of exchange… such as ownership shares, bonds, cash – or some combination of the 3.
Thus, as your business grows, it eventually represents “real value” in the form of existing assets and future revenue. But how do you convert that value into something you can spend? Unless you plan to take your business public with a public issue, determining the value of your investment can be a challenging process.
Strategically speaking, most small business owners have, or should have, an “exit strategy” that defines how they will trade the business for cash or equivalent. Exit strategies can be an outright sale of the business to an outside party, sale of the business to employees, sale of the business to a larger business for cash – as in being acquired – or exchange of equity in the business for publicly traded shares of a larger, more successful corporation.
In the latter strategy, the acquiring business refers to this as Mergers and Acquisitions, or “M & A” s.
The challenge facing the small business owner is how to value the business in a manner that will be agreeable to an acquiring entity when the time comes to execute the exit strategy.
There are six main components of valuation that are used alone, or combined in a variety of ways to come up with a perceived value. The more viable and sustainable each of these components are – the more validity the valuation has. We should hasten to say that these components are not all inclusive. Other smaller elements help determine, though to a lesser degree, the value of a small business.
- Hard Asset Value – measures the fair market value of fixed assets and equipment.
- Soft Asset Value – measures the value of the customer base in terms of future revenue potential, the value of any patents held – and their future revenue potential, and the value of brand and reputation… those marketing elements that have gained ownership of mindshare in the prospective customer base and hold the implied promise of future revenue.
- Current Asset Value – how much cash, accounts receivable, and inventory (including work-in-progress) is or will be in existence when the business is sold.
- Owner Benefit Value – focuses on how much discretionary cash flow, or net profit plus depreciation flows to the owner. This cash flow then has a multiplier applied to it based upon expected investment return, wage benefit to the owner, and any debt service outside of the normal business debts to be considered.
- Good Will – measures the value of the “functioning business” and the longevity it holds within it’s current market footprint.
- Tax Benefit – measures any outstanding tax benefits held as future assets by the business that might be applied to the acquiring entity’s current or future tax liabilities.
Valuing your business for sale, estate, divorce, or career change can be challenging. As personal business consultants, tax counselors, and CPAs – Al Rasch and associates possess the knowledge, experience, and skill sets to render a viable valuation of your business and other assets.