The value of a business generally includes the value of all of the tangible and intangible assets owned by the business. Whether the value of the business includes all of the assets (and liabilities) of the business will depend upon a few things. First, either the equity (stock or other ownership interest) that owns the business can be valued or the assets used in the business can be valued. The general rule is: buyers want to buy assets and sellers want to sell stock. Sellers want to sell the stock or other ownership interest mostly for tax purposes. Whereas, buyers want to buy assets for tax purposes, but also to avoid potential liability associated with the entity.
The purposes of a valuation will often dictate what is included in the value. For estate and gift tax purposes, the value is of the stock or equity interest owned. For transactions, the value may or may not include all the assets and liabilities. In transactions, the purchase agreement usually specifies which assets and liabilities are included in the transaction.
It is important to distinguish between what is included in the value and what is included in different multiples based on market methods methods. For example, the multiples from BIZCOMPS®, a transaction database, are assumed to be asset sales which exclude cash, accounts receivable, accounts payable and inventory. Other operating assets such as the equipment used in the business are included in the value arrived at using BIZCOMPS® multiples. Multiples from the Pratt’s Stats® database, on the other hand, are for both asset and stock sales, as indicated for each transaction. Some transactions include the working capital of businesses while others do not. Transaction multiples from the Pratt’s Stats ® database need to be examined for the details of each transaction.
Within industries, there are often rules of thumb used by business brokers to estimate the value of business. Different industries treat the assets differently. Beer taverns, according to the Business Reference Guide, sell for 6 times monthly sales plus inventory OR 1 to 1.5 times annual earnings before interest and taxes OR 55 percent of annual sales plus inventory. Other types of establishments that sell alcohol have different multiples and treat the assets differently. Rules of thumb for cocktail lounges either add inventory back, add liquor license and inventory, OR add fixtures, equipment and inventory. As illustrated, different multiples from different sources result in values that need adjustments for different assets and/or liabilities.
So what does all this mean? A business valuation will clearly state whether the stock or equity interest in a company or the net assets are being valued. If a business valuation has not been done, understand the value from the multiples you chose. If necessary adjust for assets and/or liabilities which are not included.
©2010 Florida Business Valuation Group
