Do Business Well

ASSET VALUE

For most companies the asset value should represent the lowest amount below which the owner might just as well liquidate. There are only two differences between asset value and liquidation value. In calculating asset value you don’t have the costs of liquidation and you can be more generous in appraising certain assets than you might be if you had to liquidate.

INDUSTRY STANDARD VALUE

It’s common in many industries to have a valuation method. Travel agencies are generally valued at ten times annual commission. Manufacturers’ reps, on the other hand, are generally only worth one year’s commission. Magazines use a certain number of dollars per subscriber. Manufacturers might expect to get between two and ten times annual earnings. Continue Reading »

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BOOK VALUE

Each month or quarter you should be determining the company book value. This is the net worth figure on your financial statement. It’s the difference between your total assets and total liabilities using all the rules of accounting and taxation. As you’ll see, this has very little to do with the actual worth of your company.

LIQUIDATION VALUE

You would only rarely want to sell a successful business for less than liquidation value. You might do so to provide continued employment for loyal staffers, or some types of deals might include your continued employment or the receipt of certain royalties unrelated to the sale price. You arrive at the liquidation value by adjusting each asset to take into consideration its real value, as opposed to its book value. Next, you adjust liabilities to account for any amounts that aren’t going to be realized. Finally, there’s a cost of liquidation. Let’s look at all three for some examples: Continue Reading »

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B. If one or more of your current employees is not a likely candidate for a buy-out, consider hiring your buyer. Begin an intensive search for an energetic, capable manager who could work toward ownership as part of his employment package. In this case, you could offer less pay than the individual might otherwise earn, but provide a certain percentage of ownership each year employed.

Another approach would be to find that talented individual who also has financial resources. The agreement might end up looking like a rent-to-buy. The manager would work his way toward running the entire operation over a two- or three-year period. When both parties were satisfied that the change in ownership and control could be smoothly transacted, the preset terms would be finalized. Continue Reading »

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