Where is the Hidden Value?
When companies sell, the results are all over the board regarding what the selling price is for like-sized companies. Some of the factors in a business’s value can be attributed to the physical assets that transfer from seller to buyer. These can be counted, costed, discounted or other wise modified in order to arrive at a consensus of value. At times, the valuation process ends right there, an agreement on what the physical assets are worth. But what happens if the process doesn’t end there, what happens when the non-physical assets, the intangible assets, have high value? How do you arrive at a fair price for these assets and the business?
Expert market professionals and business valuation professionals develop tools to estimate what the financial contributions are to the company from the intangible assets. Some assumptions are made when developing numbers and benchmarking them against industry peers to arrive at conclusions. Areas that are examined include the contributions made from intellectual property assets such as reputation, branding, location, capabilities of management and staff and the depth of the customer list to name a few. Reasonable estimates are made using comparison data for performance to arrive at what the dollar value these assets contribute to the bottom line. Obviously, stronger intangible assets are valued higher in the marketplace, resulting in a higher value at sale or valuation time, should it be necessary to price the value of adding a partner into the company while recognizing the founding partners’ equity at the time of new partner entry.
Like many physical assets, intangible assets require time to increase in value. The recognition of having a stellar reputation takes a while to achieve and market out to a wider audience in order to create lasting sales and value for the company. The importance of having a distinct, recognizable, defensible brand can’t be overstated. In some companies, the majority of the company’s value is due to the branding (Apple, Coca-Cola, etc).
THINK IT THROUGH
LOCATION, LOCATION, LOCATION! Cry the marketing professionals with good reason. All of the knowledge and reasoning behind this are well documented and available for your use.
For business transactions where a strategic purchase is being made, the capacity and capabilities of staff and the existing customer list can be the totality of the value of the business.
START OUT RIGHT
I am spending a lot of time in this article discussing the time of sale as being significant for good reason. Many entrepreneurs struggle for years to build a successful business that will support themselves as well as employees and sale time is almost the only way to recover the investments made over the years. The best manner to have a high value and recoup the numerous investment tranches from years past is to elevate your business practices from the start. If you don’t know what that means or how to start, call for an appointment, we are in the business of helping you figure that out.
TAKE THE CLASS; OWN THE TOOLS!
If you are in business, register and attend the Small Business Management (SBM) Program at the SOU SBDC starting at the end of September. It runs through May 2024 and is the best affordable business accelerator program in existence!
A FINAL WORD
Building value in a company takes time to accumulate assets. This can only happen through putting cash into the business, which is most likely not the reason you started it in the first place, or reinvesting the profits back in to build capacity over the long term. That capacity increase directly relates to the ability of the business to support your family.
Building your intangible assets alongside your physical assets is a surefire winner in the valuation arena. I’m hoping that you have figured out how to get the business to generate a generous return on investment and also add value to the intangibles to create enormous wealth. Through the continued addition of systems, of employee retention strategies, through management performance monitoring, through keeping an eye on your KPI’s, the realization of a great valuation is possible, regardless of what the strength of the market is at sale time.
― Marshall Doak
Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells. He can be reached through: email@example.com or 541-646-4126.