If you鈥檙e buying or selling a business 鈥� or need a valuation for investment or insurance purposes 鈥� you鈥檒l need to weigh the value of any business assets in your calculations.
Naturally, many factors will affect business valuation, not least the thorny issue of how much a buyer is prepared to pay in the prevailing market but totting up its tangible and intangible assets will at least provide a starting point for negotiations.
It鈥檚 worth bearing in mind that an asset-based valuation is likely to produce the lowest value for a business as it doesn鈥檛 take into account any 鈥榞oodwill鈥� premium that may contribute to its market value. Businesses with significant tangible assets 鈥� like real estate 鈥� are often valued using this method, especially if the business itself is under-performing or trading at a loss.
Tangible Assets
Tangible assets include cash, land, buildings, equipment and inventory. The net book value (NBV) of assets should be up to date and take account of any changes in value or the depreciation of assets like machinery which may have to be sold at a discount. It鈥檚 important to be realistic about the value of assets 鈥� just because you paid 拢10K for a bespoke piece of signage, doesn鈥檛 mean it adds 拢10K-worth of value to the business.
Intangible Assets
Intangible assets include non-physical considerations that add commercial value or provide a competitive advantage, such as intellectual property 鈥� copyrights, patents, trademarks and the like, but excluding goodwill. Their value can be hard to determine but you could look at the estimated cost of acquiring new assets or estimate the value of income earned from the asset. Only list intangible assets on the balance sheet if they have an identifiable value 鈥� assets developed internally (like a software system) may not have a reportable value. Consider seeking professional advice if there鈥檚 a lot to review.
Once you鈥檝e determined the value of your assets, simply subtract any liabilities to get to your final figure. If you鈥檙e valuing to sell or buy, it鈥檚 usual to employ a range of valuation methods including a multiple of profits or discounted cash flow approach to arrive at the fairest price, but an asset valuation is a good place to start and will get the ball rolling.
