Business Valuation and the Role of Assets

In our ever-growing series on increasing your business value before your transition, we’ve explored concepts like social capital and quality of life. These often intangible concepts rely on circumstances mostly outside of our control, such as how our communities view our business or the current social climate. 

With assets, the main determining factor of their role in your business value is your management of them. Assets are, by definition, the things that are uniquely yours. They are intrinsically valuable because they are available at a moment’s notice to be used as you see fit. 

Assets: Flexible and Unique to Your Company

Depending on your industry, assets could include just about anything that is considered useful or valuable to your company. From inventory to customer email lists, all of the things that your business possesses that has the chance to increase growth could be called an asset. 

For example, if you run a doggy daycare, obvious assets would include things like your building, leashes, kennels, and dog food. These are the items on your data sheets that have a very clear dollar amount listed next to them, so that in the event of a sale or liquidation, you know how much you have to go towards paying off debts. 

 Less obvious assets would include things like lists of people who have searched for doggy daycares in the last 30 days, a discount program with the local pet groomer, and veterinary techs onsite to assist in any pet-related emergency situation.

To a buyer, all of those things come together to add value to your company. In addition to tangible items, the relationships and data that you can offer in conjunction with the sale are going to boost your probability of selling for the amount you’re looking for. 

On the other hand, if your doggy daycare lacks amenities and partnerships that appeal to the area and demographic you serve, and you’re losing money because of it, you lack the necessary assets to boost your value in the eyes of the buyer. 

When someone takes over your business, they want to do so with the knowledge that you are already thriving. The more assets that you can offer in addition to the sale of the business, the more likely you are to have a satisfactory transaction for both parties. 

Common Assets 

While the types of assets will vary by the industry that a business is in, there are some commonalities that most account sheets can list as positive marks on their value. These can include:

• Cash on hand
• Ongoing accounts with regular payment dates
• All stock and inventory, both on the shelves and pre-ordered
• Prepaid expenses, like telecom, utilities, and rent
• Any vehicles, including company cars or cargo trailers
• Land that your company owns and the buildings on that land
• Furniture and fixtures that your business owns
• Technology, machines, and POS systems that aid you in successfully running your business

Asset-Based Valuation

Asset-based valuation is one of the three key approaches to placing a dollar amount on your business. In general, they are categorized as either going concern or liquidation asset-based. In both cases, you and the future buyers of your business are going to consider the net value of all of your assets, minus the total liabilities. 

For businesses that are transitioning, it is almost certain that you would use the going concern model. The liquidation model is only appropriate for businesses that are planning to close down completely and liquidate all assets in order to pay debts. 

If your transition is based on selling the business to a willing buyer, the assets that you have within your business are going to pass on to the new owner through the transaction. These tangible and intangible assets are much more valuable in this case than they would be if they were liquidated at market value. This means that keeping a running tab on the ways that assets contribute value to your business is imperative as you near your exit. 

In the years and months leading up to your transition, take the time to consider all of the pieces that come together to make your business work. Presenting a list of inventory, amenities, staff, training, data, and talent that you already have on hand is going to give your business the boost it needs to complete a sale that works for both ends of the equation.