What is included in the valuation of a business for sale or purchase

In business purchase and sale transactions, the main question asked by both the seller and the buyer is the question of determining the price of the transaction, that is, the value of the business being sold. What should be evaluated in this calculation, we will describe in this article.

So, we need to estimate the cost of a business to sell or buy. How to do it? There are several effective calculation methods, which we described in the article "How to value a business for sale or purchase".

The next question you have — What is included in the cost of a business? What exactly needs to be assessed? Let us consider in detail the most important components of the value of your business, which primarily affect its price.

1. What is included in the calculation of the cost of a business?

The value of a business to sell is made up of many factors that may vary by industry, market, and business model. However, in general terms, the value of a business may depend on the following factors:

• Financial metrics: Key metrics such as revenue, earnings, profitability, cash flow, assets, and liabilities can have a significant impact on the value of a business. Investors and buyers typically evaluate these figures to determine the business's potential for future profits.
• Tangible and intangible assets: what the company owns and what will be transferred to its future owner.
• Growth and potential: A business's ability to grow and its future potential can also influence its value. For example, a business with strong growth and the prospect of expanding into new markets may be more valuable than a business with low potential.
• Competitive Position: The competitive position of a business and its relationship to other players in the market can also affect value. A business with unique competitive advantages may be worth more than a business that is easy to replace or compete with.
• Team and management: The qualifications of the team and the quality of business management can also affect the cost. A business with experienced and efficient management and a highly skilled team can be more successful. Unless, of course, the new owner manages to motivate and keep it.
• Infrastructure: The physical infrastructure and technology used in a business can also affect its value. A business with modern technology and efficient infrastructure can be more valuable than a business with outdated equipment and systems.
• Legal and financial risks: Risks associated with legal and financial issues can also affect the value of a business.

There are examples when businesses with the same profit can have different costs depending on what processes are already built in them and do not require additional intervention from the future owner. This may be reflected in a surcharge.

2. What are business assets?

Assets — these are property, receivables and other items that contribute to the creation of income: for example, money in accounts, equipment, vehicles, real estate, receivables, stocks, raw materials, licenses, trademarks, bank deposits, shares and bonds of other companies.< /p>

That is, — it is all the property of the business that participates in generating income. Assets can be divided into several types based on their origin, life cycle and physical presence.

Most often, assets are divided into financial, tangible and intangible.

3. What is included in financial assets?

Financial assets — it is a set of financial resources owned directly by a legal entity.

Financial assets include the following components:

• Cash of the organization, including those held in bank accounts and cash on hand.
• Securities: shares, shares, equity instruments.
• Financial investment.
• Accounts receivable.
• Other settlement documents.

The valuation of financial assets allows us to draw a conclusion about the current solvency of the enterprise.

4. What are tangible assets?

Tangible assets — they are physical properties that affect the value of your company. They differ in physical embodiment (they can be seen, touched, etc.), measurable in physical units (pieces, tons, kilograms, running meters, etc.), and are also subject to material wear.

It is also easy to estimate the value of tangible assets.

5. What are tangible assets made of?

Tangible assets may include:

• Lands
• Corporate buildings
• Inventories and equipment
•  Inventory of products owned by the company (not yet paid by customers).

Tangible assets can be converted into financial assets. Depending on the convertibility, tangible assets are divided into two categories:

Current assets

Current tangible assets — these are liquid or short-term objects that are quickly convertible into cash equivalents (currency, inventory, receivables, etc.). The conversion process usually takes less than one year, which allows you to quickly receive the necessary funds if necessary.

Fixed assets

Fixed or long-term assets are not so easy to turn into money, as the conversion process takes quite a long time. The most prominent examples of long-term assets are corporate buildings, offices, land and special equipment. But fixed assets allow enterprises to work without delay.

6. What are intangible assets?

Intangible assets — these are objects of intellectual property that are used for more than 1 year and generate income. However, they do not have a material form and are separable from other assets.

7. What are intangible assets made of?

Intangible assets (IA) include:

• Brand Value
• Corporate intellectual property
• Trade secret
• Copyright
• Trademarks
• Licenses
• Patents
• Goodwill

It will take time to convert their intangible assets into cash as they lack the liquidity inherent in underlying assets. Determining the real value of any intangible asset — rather complex process due to its non-physical nature.

Goodwill has a special position as part of intangible assets. It cannot be created independently, there is no property right to it, it cannot be transferred, sold or donated separately from the organization as a whole. Goodwill appears as an intangible asset only in two cases:

• sale of a business (an organization as a property complex, its trademarks and exclusive rights to intangible assets);
• buying a business.

Intangible assets increase the value of the business also by the fact that some of their types can be sold separately.

Existing patents can be used as collateral to raise funding. The rights to intangible assets are governed by the laws of the country in which the activity is carried out.

It is important to formalize the transfer of a trademark to a new owner when buying a company. There are many cases where the sale of a business was carried out, and the rights to use a trademark or developments were not formalized in accordance with the law. In such a situation, the former owner retains the full right to demand payment of a commission from the company's profits or to completely prohibit the release of products.

Intangible assets help companies create a recognizable brand and generally have a strong impact on business performance.

8. What other assets are there?

It is not uncommon to use an asset classification based on convertibility and use characteristics.

Convertibility

A high level of convertibility means you can easily convert your assets into cash or cash equivalents. Assets classified by convertibility can also be divided into two groups: current assets (short-term assets) and non-current assets (fixed or long-term assets).

Current assets

They are sometimes referred to as short-term or liquid assets because they can be converted into cash or cash equivalent in a short time.

Non-current assets

They cannot easily be converted into cash. The conversion process can take years or even decades. Assets of this type are also called "fixed" assets. and "long-term". However, the monetary value of such properties is usually higher than the value of working capital, which can be converted into cash equivalents here and now.

Usage

This classification of assets is related to their practical use or purpose. Assets, according to this characteristic, are divided into operating and non-operating.

Operating assets

Operating assets play an important role in the routine processes of any business, generating income from the company's core activities. Simply put, these are assets used regularly in the day-to-day running of a business.

Non-operating assets

Also used to generate income, but companies can continue to thrive without them. They do not have the efficiency of operating assets and provide fewer benefits.

9. How can the value of assets change?

Tangible assets are generally subject to depreciation. Wear — is the process by which the value of a tangible asset is spread over its useful life. Assets can depreciate in value over a fairly short period of time. It is worth taking into account such a nuance that tangible assets are vulnerable to external factors. For example, buildings can be demolished, and land can be damaged by fire or natural disasters. To avoid such risks, business owners purchase insurance for their tangible assets.

All intangible assets are also subject to depreciation — the process of allocating the value of an intangible asset over its useful life. However, here we are not talking about physical deterioration, but about moral obsolescence. For example, pager patents have completely different values today and 30 years ago.

Intangible assets may not be subject to the threat of natural disasters, but are vulnerable to controversial corporate decisions. Their value can be influenced by the market situation, as well as political and economic processes in the country.

10. Who and when should evaluate the assets in a transaction?

The valuation of the company's assets is carried out on the basis of legal due diligence of rights, analysis of the real state of financial statements and business development forecasts. Assets are valued based on their purchase price or actual cost of production less depreciation. When selling or buying a business, such a procedure should be carried out by highly qualified specialists. In general, this work is carried out by business brokers, if necessary, involving auditors, appraisers specializing in various types of assets, intellectual property experts, etc. One of the examples of such specialists — this is a professional REAB consortium team.