How much is your company worth? It’s one of the most important questions for anyone in the business world to answer, but it’s also one of the most difficult. Defining this requires you to have a precise knowledge of the value of the organization’s assets, which isn’t always easy to determine.
The assets of a company can cover everything from desk chairs to custom software to intellectual property, and it’s important to be as accurate as possible. Some items won’t be worth what your company paid for them, while others might have been developed in-house and therefore won’t have an attached value.
There are quite a few different things you need to be aware of when valuing business assets, but as long as you aim to be as realistic as possible, you should be able to draw up an accurate picture of how much your company is worth.
Some of the assets your business owns will be tangible. This means they’re physical items, such as:
Cash also counts as a tangible asset, but is obviously very easy to calculate the value of. That said, if you hold cash in a number of currencies you’ll need to factor in changes in exchange rates.
Every asset has a net book value (NBV), sometimes called a net asset value, which is defined as the amount you list it’s worth on your balance sheet. You need to ensure you’re keeping this up-to-date at least once a year, as most tangible assets won’t remain at the same value.
Most items depreciate in value on a year-by-year basis, at different rates depending on the item. The easiest way to estimate it is to base it on how long the asset’s lifespan is. For example, if you purchase a computer for $500 that will probably need replacing in five years, it’s going to depreciate by $100 per year.
This doesn’t necessarily work for every asset you own, and it’s important to be realistic. For instance, items with the company logo on them might not be worth much at all if you were to sell them off individually. Businesses might also use accelerated depreciation to defer some of their tax burden to later years, which can give an inaccurate picture of how much an asset is actually worth.
These are the non-physical items that add value to the company. This can include lists of:
- non-compete agreements
- intellectual property such as patents, trademarks and copyright
These may well count as more valuable than your tangible assets. Laura-Lee Brenneman, a director in BDC’s Growth and Transition Capital team, called them “the secret sauce the buyer pays more for” and added: “Agreeing to the value of these types of assets and the rest of your business is often the biggest sticking point when selling a company.”
You can always hire a valuator to help you determine how much intangible assets are worth, and if you’re selling your business this is often a good idea. However, if you want to do it yourself there are a number of different methods you can use.
If the asset is fairly new, you can calculate the cost of developing it and add an expected return on investment over its lifespan. This is the least accurate method, but is sometimes the only option with assets that haven’t existed for long.
Another option is to forecast the amount the asset is expected to generate after tax. This is complicated, but very accurate. You can also predict the revenue it’s expected to generate then apply a comparable industry royalty rate before subtracting taxes.
Whether the asset is tangible or intangible, it’s crucial that you’re accurate and realistic. If something cost you a lot but wouldn’t sell for anything now, it’s value will be close to zero. Stick to this rule and you’re likely to get a good picture of the value of your business assets.