A question I am asked frequently is: Can this business be valued?
I have written multiple blogs recently on various scenarios including:
- Part 1: Valuation of a business that has been operating for years, but with incomplete or poor financial data.
- Part 2: Valuation of a start-up
- Part 3: Valuation of a nonprofitable business
Then I realized there is another category of business: businesses that are worth more closed than continuing to operate.
This does not necessarily mean the business is not profitable. The business is typically technically viable, generating income and in some instances, profitable. That is why they do not fall into the category of the businesses discussed in Part 3 of this blog series.
So what is going on that makes a business more valuable shut down?
Often the business has been operating for many years. The owner or owners are satisfied with the income derived from the business. In many cases the real estate associated with the business has appreciated significantly over the years. Additionally, for many businesses in this category, other assets, including heavy equipment, have been acquired over the years and the metal itself has value.
An overview of determining value of these businesses
In prior blogs in this series, I emphasized the importance of financial forecasts as an important starting point in the valuation process. In these circumstances, the forecast reveals the business is not viable. Applying the asset approach to valuation, I focus on the underlying assets of the business where real estate and equipment tend to be the business’ most valuable assets. Valuation is determined based on establishing the liquidity value of each asset, including real estate. The result of the detailed valuation analysis is that the business is worth more by closing and liquidating its assets than it is by continuing to operate.
Common triggers for valuing such a business
As one would expect, one trigger for needing a valuation of a business in this category is bankruptcy. The valuation is leveraged to determine payouts to debtors.
Another trigger for needing a valuation of a business that is worth more closed than continuing to operate is when the business is losing money and the situation is not fixable. Like the bankruptcy situation, the viable option is liquidating the business. The business valuation is the sum of the value of the underlying assets of the business.
The other trigger is settling an estate. Usually, the business has operated for many years and the owner or owners were satisfied with the income generated and their modest lifestyle. To settle the estate, the valuation of the business determines that more value would be generated by closing the business and liquidating the assets than continuing to operate.
As these four blogs have described, any business can be valued. The key is to secure a certified business appraiser, a professional who focuses on business valuation, with a proven track record and process so that the valuation is objective, thorough, and defensible should it need to stand up to scrutiny.
Whether selling or buying a business, allocating assets as part of a divorce, settling an estate or settling a shareholder dispute, when you need a business valuation, contact us.
When values matter.