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Business Workshop: Value of business may vary
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Sooner or later, most business owners want to know what their business is worth. Maybe the owner is considering the sale of part or all of it, or he wants to take out a loan for expansion. Or perhaps she's putting together an estate plan and wants to estimate taxes.
Whatever the reason, valuing a business is a delicate matter that has to take into account many factors, some of which are subject to interpretation.
The value of a business consists of tangible assets and intangible assets. It is relatively easy to place a value on tangible assets, which include equipment, buildings, vehicles and accounts receivables.
It is much more difficult to set a value on intangible assets such as copyrights, trade secrets, patents, competitive advantages, employee skills and "good will," which sometimes is used to mean the reputation the business enjoys and sometimes is used to mean all intangible assets.
Many factors can affect how the intangible assets of a company are valued, including:
• State of the market: is it growing or shrinking?
• Level and aggressiveness of the competition
• Past rates of business loss and gain
• Expected future earnings
• Profitability
Even profitability is subject to interpretation. For example, current management may spend a lot entertaining clients that a future owner might instead keep as earnings, leading to an increase in profit over what the current books show.
The purpose of the valuation can affect the final number for the worth of a business. For example, if the purpose is to set a price for selling or buying the business, all market factors must be taken into account.
-- Herb Wolfson, Wittlen, Simon & Newman, wsnpc@msn.com
First Published February 18, 2013 12:00 am
