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Business Valuation Checklist
How To Value a Business
Determining the value of your business can be a complex task, with many factors to be considered.
Here is a handy business valuation checklist that you and your business appraiser can use to keep track of key business valuation elements.
Tangible assets
Regardless of the business valuation method used, it will almost certainly include a valuation of the physical assets of your business. These include:
1. Buildings and equipment
2. Property
3. Vehicles
4. Inventories
Financial assets
Your business is a cash-producing and spending machine that exists in the financial world. Here are some of its financial assets that need to be included in a business valuation checklist:
1. Cash
2. Stocks, securities, insurance policies
3. Accounts receivable
Goodwill
These are the things you can´t see or touch but nevertheless have value – often great value. Goodwill becomes an important factor when a company is purchased for an amount exceeding the identifiable assets of the company. The difference between the purchase price and the company´s net book value is the goodwill of the purchased company.
Institutional goodwill refers to the business, its position in the marketplace, and its ability to effectively serve its customers.
Professional practice goodwill refers to professional practices such as architects, CPAs, doctors, engineers, lawyers, and other professional services. The professional practice goodwill has two components: practitioner goodwill and practice goodwill.
Elements of goodwill include:
1. Your brand name and logo
2. Expertise and experience of employees
3. Patents or trademarks
4. The opportunity cost required to build up the business from scratch
5. The difference between the net book value of the company and the fair market value of comparable enterprises
For example, consider two drug companies of exactly the same size and the same capitalisation. Company A enjoys an unblemished reputation. Company B was recently involved in a tainted product scandal that damaged its reputation. Due to its higher goodwill value, Company A will have a higher valuation for the purposes of selling the business.
Liabilities
Business valuation guidelines must include not only assets but liabilities.
For example, drug company B may have similar cash flow and market share as its rival company A, but because of the product scandal it has been forced to pay millions of pounds in legal settlements.
This can be significant; in 1995 Dow Corning, the U.S. maker of silicone breast implants, filed for bankruptcy in the face of thousands of lawsuits from consumers.
Normal business liabilities can include:
1. Outstanding loans
2. Accounts payable
3. Tax issues
4. Depreciation
Contracts and agreements
The valuation of a business enterprise can also be affected by relationships and contracts. For example, a car manufacturer that is locked into long-term union contracts may be forced to pay more for labour than a competitor that runs a non-union factory. Relevant agreements can include:
1. Contracts including consulting contracts, non-compete agreements, employment contracts, employee benefits plans, equipment lease or rental contracts, labour contracts, loan agreements, royalty agreements, and supplier or franchise agreements.
2. Pension, profit-sharing, or stock options.
3. Existing buy-sell or corporate redemption agreements to purchase stock, rights of first refusal, or partnership interest.
When undertaking a business appraisal, creating a business valuation checklist will save you both time and money.
To discover how Incisive Edge will grow your business email growth@incisive-edge.com or call 0843 289 7884 .
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