Is There Value in Your Business?
Let me begin with a huge caveat – the facts and circumstances of every business are different. And, there is no way to definitively determine the value of a business (unless of course it is sold) without an evaluator assessing the fact-basis and completing the appropriate valuation analyses for the entity.
For instance, I once valued a chiropractor’s office. On the face of it, they were operating at near break-even, and it appeared that there was minimal, if any value. It was not until I was fully engaged that I learned the owner was working part-time and paying herself a full-time salary along with other perks and benefits passed through the business. When adjustments were made to account for these facts, the business had quite a lot of value.
Given this limitation, let me offer a few ways to help you determine whether a business might have value. These analyses are not fool-proof and should not, in any circumstances substitute for an actual valuation.
Net Tangible Assets (or Adjusted Book Value)
A positive adjusted book value indicates the business has value. Determining the adjusted book value of a business is based on the company’s balance sheet and is a very straight-forward analysis.
First, remove any intangible assets, the associated amortization and any non-operating assets or liabilities. If you (and your spouse) are 100% equity owners, then remove any loans to or from the business.
After these adjustments have been made, simply subtract liabilities from assets. If the difference is positive, then the business most likely has value. For most operating companies, this is the minimum value of the business.
Net Cash Flow
A business with positive cash flow generally has value. But, getting to the right cash flow is a process.
First, you will want to review at least three years of income statements.Then, you will want to remove:
- Non-cash items, such as depreciation and amortization.
Personal expenses that the owner may have passed through the business, such as non-business related auto expenses or country club dues. - One-time and non-operating income and expenses.
- Also, replace the owner’s compensation with a market rate salary for a hypothetical person to assume the owner’s roles and responsibilities.
If the average cash flow over the last three years is positive, then the business most likely has value.
Market Multiple (or Tribal Lore)
This is probably the least reliable method to value a business, but can be an indicator of whether the business has value.
Many industries have a rule of thumb to determine the approximate value of a business, such as a multiple of revenue or cash flow. If this multiple is appropriately applied and the result is positive, then the business may have value. T he greater the outcome, the more likely the business has value.
If you need to place a value on a business and the entity passes one or more of the above tests, then getting a formal valuation is most likely a good investment.
If you would like to know if it is worth the investment to have your business valued, please give me a call. I would be happy to help.