27 May
Is it possible that the assets of a business are worth more than the business itself?
Posted in General valuation topics on 27.05.10
Unfortunately, this is true. There are times with a business is worth more dead than alive. The value of a business can be divided between its tangible and intangible assets. Tangible assets are the physical assets used in business operations such as equipment, real estate and inventory. Intangible assets include things such as the goodwill and customer lists.
In general, a business is usually worth at least as much as its net assets (assets less liabilities). A profitable business is usually worth more than its net assets.
Typically, healthy businesses produce a return on both the tangible and intangible asset in the form of profits and cash flow.
When a business is operating at a loss, it may indicate that the intangible assets have little or no value. However, losses can arise from situations other than diminished goodwill, such as the current recession.
If a company does not have prospects of operating profitably in the future, a rational owner would choose to close the business and sell the assets. At a loss, the company is not producing a return on its tangible or its intangible assets (assuming there are intangible assets.) However, if the company is expected to rebound, the business can still have value. In other words, loss companies can still have value.
The challenge is to determine what value a loss company has in excess of its assets.
©2010 Florida Business Valuation Group