One of the most integral aspects of attaining small business funding is working out what your business is worth. Understanding the value of your assets is vitally important when buying, selling or just running your business.
If you are looking to get additional funding for your business then having a clear idea, backed up by asset valuation, of the worth of your business will help your ability to attain finance.
There are many reasons to look into how much your business assets are worth, including:
- Bringing onboard a new partner
- Small business funding
- Buying or selling a business
- Negotiating better terms
- Improving its ‘value’ to investors.
Why Business Assets Are Important
When looking at your business assets you are going to find there are tangible and intangible business assets. Both of which are capable of adding value to your business. Protecting these assets are important in each of the reasons stated above.
Protecting Your Assets
Looking after your business assets can help to decrease the risk of it being viewed as less valuable, important in both the potential sale of your business or more practically, in attracting funding for it.
Ensuring that your plant, machinery and technology is in its best condition can help your efficiency and profitability and protecting your intangible assets, like your brand, can safeguard your business from competition or industrial theft and fraud.
This means you need to be absolutely clear in knowing what your business assets are and identifying their importance and value to you. It might also highlight whether it is time to replace, upgrade or renew your asset agreements and finance.
Identifying Your Assets
These may be ensuring that your assets are insured, protected or making them your intellectual property. It might also mean getting independent valuations on your equipment and machinery. But it can also mean identifying how your business model and your staff operate and train to advance your business strategy and growth; are they a business asset too?.
Valuing Your Business Assets
There are three fundamental ways in which you can identify what your business is worth and the value of your business assets:
Asset Value – value of business assets
Market Value – analysis of comparable companies
Income Value – cash-flow
Asset Value of Your Business
When looking at the value of your assets they will become either a set of assets or liabilities. Valuing your business assets focuses on net asset value; a market value of the total assets minus its liabilities. The key assets of your business are calculated by asking the question: How much will it cost to set up a new business with equal economic benefit?
This isn’t quite as straightforward as it sounds. It means calculating what assets need to be included and what they are actually worth. For instance if your business makes particular or unique products then calculating their worth might be more than just their current market value. And then there are tangible and intangible assets.
Tangible Business Assets
Depending on the size and age of your business, asset value can vary enormously. A new business has likely incurred debts up until now, has few tangible assets but has the potential to increase profits substantially in the next few years. Whereas an older business might be financially more stable, own more assets, but might not be able to increase its market position (and therefore revenue) when forecasting.
The tangible assets which you can include are:
Buildings
- Vehicles
- Raw materials
- Website
- Machinery
- Plant
- Computers & IT
- Product (i.e. stock)
- Investments.
All of your assets will have a cost to buy, a replacement cost and your forecast of their ability to generate cash flow. And while purchases will depreciate, the difference between their cash-flow and cost to replace is likely to increase.
Intangible Business Assets
There is also the intangibles of calculating your assets including things like your brand, labour force and your industry-positioning. Some of which might be subjective, but nevertheless a marketable asset. This then requires some sort of value that takes into consideration the book value of assets as well as the replacement value of some of the more intangible assets.
The intangible assets which you can include are:
- Brand
- Customer goodwill
- Key personnel
- Patents
- Intellectual property
- Customer databases
- Trademarks
- Trade agreements
- Social media reach
- Contracts
- Non-compete agreements
- Staff training
- Client/Customer relationships.
Sometimes the fair market value of an intangible asset can be greater than that of a tangible one For instance the increasing amount of FinTech and SaaS companies operating are making intangible asset valuation increasingly blurry.
Market Value of Your Business
This is an estimation of your standing within your industry. Are you important and do you have a strategic foothold in the industry you are competing in?
Having a comparison-based approach to the value of your business can identify what kind of market share you currently command and the potential for increasing it. Have a look at your industry and assess the value of other businesses operating within it. How do you compare?
No business is unique, there are always other businesses operating within the same sphere offering competing products or competing for similar market share.
Finding the equilibrium of what a seller will happily accept and what a buyer will reasonably pay is called fair market value. The market value of your business is an opportunity to assess what is a fair going rate for a business like yours. Relevant if you are looking to sell your business or are looking for an investor to finance some, or a larger part, of small business funding and is looking to ‘purchase’ a proportion of your business in exchange.
Income Value of Your Business
This is the type of valuation you will most likely come across when seeking external finance and small business funding. Through current performance and forecast revenues, a business can arrive at a net figure that indicates the financial value of that business. Forecasts are often conducted for a period of three to five years showing the value and risks of the business.
One simple method of calculating your Income Value is by using the rule of thumb and your previous year’s accounts to calculate net profit and predict future net profit by multiplying your adjusted cash flow (typically by 2 for service industries and up to 3.5 for manufacturing).
Different industries are going to use different rules of thumb to calculate the value and they are often applied to industries where buying and selling (and continuous valuations) are common. If you are a retail business then you might find this relates to multiples of turnover or the number of customers and retail outlets.
In short, this is a way of demonstrating the real-time and forecasted profitability of your business.
Business Assets: Your Growth Barometer
Even if you aren’t planning an exit from your business, taking an overview of your business’s worth can be an important step in realising business funding and growth opportunities. Despite the actual value of your business assets, your business is only ever worth what someone is willing to pay for it. Other factors include:
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) – This can often reveal a more accurate picture of the profitability of your business where business value is judged more on market position, the quality of your business assets and your growth potential.
Economic Conditions – The timing of your valuation will affect the results of your business’s worth. When the economy is in growth a company will be able to attract a higher valuation than when the economy takes a downturn. This can be lower interest rates for borrowing and any impending taxation changes that can alter your business’s value.
Supply & Demand – If your business is one of a limited number in a high growth or performing industry and there are plenty of potential investors looking to invest then your business will be seen favourably and result in higher levels of funding or, if selling, a higher price. However conversely, if your business is currently languishing in a saturated market with stiff competition and few investors, then your business value will plummet.
Financial Management – To show the maximum potential for growth, it is important to ensure that your finances are clean and your cash flow, creditors and debtors are fully documented. Potential investors in your business will be put off if you don’t have full, open and honest accounting. If you don’t produce management accounts you will not be able to fully disclose the actual performance of your business. The strength of your balance sheet is going to affect and influence the value placed on your business, especially if you are a small business and funding is required.
Customers – What is the value of your customer base? Your customers often form a key asset for your business and whether you like or not, you will have devoted a significant portion of your efforts in ensuring they stay customers. Moreover, customer lists have the tendency to drop over time, so what efforts have you undertaken to ensure that your customer database doesn’t stagnate?
If you are looking to seek small business funding and are looking to find out what your actual assets are worth in the current market, talk to Funding Guru. We are often able to find funding by looking at your actual business’s value, not just at your previous filed accounts. We excel at finding business loans that can’t find them elsewhere.
