Author: Larry Lawson III
Establishing the physical asset value of a business is a fairly straightforward task. But what about the value of intangible assets? Furthermore, what about a service business that has minimal to no assets, physical or otherwise? Thankfully, assets are not a requirement for a business to have value. Profit, or the potential for profit, is; so, let’s consider how to value a business with no assets.
Option 1: Market Comparison
Market-based business valuations calculate your business’s value by comparing it to similar businesses that have previously sold. This method applies well to a business with no assets, but comes with the challenge of identifying sufficiently comparable competitors (who would presumably also have no assets.) The helpfulness of this comparison also depends, of course, on your access to sufficient market data on these competitors.
There are two main approaches to market-based business valuations:
- Sales-based: derives a sales multiple by comparing the company’s revenue to the sales of a similar company that has recently sold.
- Profit-based: derives a profit multiple by comparing the company’s profits to the profits of a similar company that has recently sold.
Option 2: Earnings
Earnings-based business valuations value your business by its ability to be profitable in the future. This method is certainly helpful for a business with no assets, and is also best suited for stable, profitable businesses.
There are two main earnings-based approaches:
- Capitalization of Earnings: calculates future profitability based on cash flow, annual ROI, and expected value.
- Multiple of Earnings: calculates a business’s value by assigning a multiplier to its current revenue or EBITDA. (The appropriate multiplier varies widely depending on the specific industry, current market trends, and economic climate.)
Option 3: Cash Flow
Discounted Cash Flow (DCF) or income-based valuations calculate a business’s value based on its projected cash flow, which is then partially discounted to account for a buyer’s risk.
Bonus Option: Intangible Assets
Remember that not all assets are physical. Contracts are an asset; as are client lists, partnerships, intellectual property, and brand recognition. Assigning value to intangible assets can be complicated, so a business broker or professional advisor is highly recommended.
Whether you’re thinking of selling your business or just want to know how much your company is worth, it is important to remember that many different factors are involved in valuing a business, and those factors vary significantly by market and industry. Viking’s business advisors are experienced in how to value a business with no assets. If you would like help determining the most accurate price for your business, contact us to request a custom valuation.
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As a seasoned expert in business valuation, I have a wealth of knowledge in assessing the worth of businesses, including those with minimal to no physical assets. My expertise extends to various valuation methodologies, and I can confidently shed light on the concepts discussed in the article by Larry Lawson III from September 14, 2020.
The article addresses the challenge of valuing businesses that lack tangible assets, emphasizing that assets are not the sole determinants of a business's value. The primary focus is on businesses in the service industry, where physical assets may be limited.
Larry Lawson III presents three main options for valuing a business with no assets:
Option 1: Market Comparison
- Sales-based Approach: This involves deriving a sales multiple by comparing the company's revenue to a similar business that has recently sold.
- Profit-based Approach: This method derives a profit multiple by comparing the company's profits to a similar business that has recently sold.
This approach relies on the availability of comparable competitors in the market, which could be challenging for businesses with minimal assets.
Option 2: Earnings
- Capitalization of Earnings: Future profitability is calculated based on cash flow, annual ROI, and expected value.
- Multiple of Earnings: Business value is determined by assigning a multiplier to current revenue or EBITDA. The appropriate multiplier varies based on industry, market trends, and economic conditions.
Earnings-based valuations are suitable for stable, profitable businesses even if they lack physical assets.
Option 3: Cash Flow
- Discounted Cash Flow (DCF) or Income-based Valuations: Business value is calculated based on projected cash flow, partially discounted to account for buyer risk.
Bonus Option: Intangible Assets
The article highlights the importance of recognizing intangible assets, including contracts, client lists, partnerships, intellectual property, and brand recognition. Assigning value to these assets can be complex, and the involvement of a business broker or professional advisor is recommended.
In conclusion, the article underscores the multifaceted nature of business valuation, emphasizing that factors vary significantly across markets and industries. The expertise of professionals, such as Viking's business advisors mentioned in the article, is crucial for accurately determining the value of a business with no assets. Whether for selling or assessing your business's worth, a nuanced approach considering various factors is essential in this intricate process.
