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How to Appraise a Business When the Value of the Assets Is Higher Than an Earnings-Based Appraisal
When selling a business the appraisal is one of the most important steps. A good appraisal gives the business owner an accurate gauge of their position in the market and an idea of an achievable sale price. There are a number of ways to appraise a business and the approach to take depends on the type of business and assets available.
Most buyers look at possible earnings when assessing the value of a business, but when the value of assets is higher than an earnings-based appraisal, it can be a good idea to focus marketing on those assets.
An Assets Based Approach
The asset appraisal looks at the business as a set of assets and liabilities. At the most basic, the value of the assets and liabilities is determined and the difference between them is the business value. The difficulty comes in determining which assets and liabilities to include in the valuation and measuring their worth.
For the business owner ready to sell, highlighting assets and minimising liabilities (without outright hiding them) becomes an essential part of marketing.
The physical assets of the business are the most obvious to determine. Tangible assets which business owners might include in valuation include stock, equipment and real estate.
When determining the value of these assets, think about what it would cost to create a similar business today. A buyer is getting all these assets in a bundle rather than having to start from the beginning with all new stock and equipment.
Intangible assets can be relatively easy to list and value, but it is often the intangible assets that make a business a success. Some of these intangible assets are regularly included in business valuation, even if they aren’t listed on any balance sheet.
A strong customer base, well-known brand and good reputation should all be considered as valuable business assets. In a world of Google and online business, a well-constructed website and a large social media footprint are also of great value.
Lastly, there are those things that marketers would call unique selling propositions. These are things that make a business stand out from similar companies and keep customers coming back. An example would be grandma’s spice cake recipe for the bakery.
Processes, recipes or products developed internally are often what attracts customers. Because they are developed internally, they don’t have an obvious cost associated and they don’t always get included as an asset. However, they may be the most valuable asset a business owns.
It is hard to put a price on intangible assets, but think again about how much it would cost, in time and money, to develop these assets from scratch. Building a reputation and drawing in customers takes time and in a new business this would be time when the company is not making money.
Liabilities also come in the form of tangible and intangible. The most obvious are those already listed on the balance sheet. Accounts payable, loans, deferred revenues and accrued expenses all count as liabilities that need to be considered. But just as a good reputation and strong brand are assets in a business, a bad reputation is a liability that needs to be considered in a valuation. A weak, or non-existent, presence on the internet and social media can also be considered a liability, as it’s something a new owner will need to develop.
If a business is relying on an asset based appraisal, it’s important to minimise these liabilities at the beginning of the process.
An income approach to appraisal asks what money the buyer will get and when. An asset approach determines the value in the business by asking what it would cost in time and money to build the business today. With valuable assets and minimal liabilities, an asset based approach allows a seller to show buyers what their business is truly worth.
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