The asset approach estimates the value of the business based on the fair market value of a company’s assets, minus the fair market value of its liabilities. Each recorded asset must be examined and adjusted to fair market value. Individual intangible assets should be identified and valued as well. With the variety of accelerated depreciation methods available today, careful consideration of each asset must be completed since net book value and fair market value can vary widely.
As part of the valuation process, a business appraiser can assist the owner in assessing the business’s “value drivers” and risk factors, which affect the company’s future earnings prospects. When considering items that could impact the value of their businesses, many owners focus on revenues, profits or net assets. However, there are many other factors, both external and internal, that may influence value.
External factors include such factors as financial markets, availability of capital, interest rates, economic trends, demographics, industry conditions and trends, market share, the competitive environment and government regulation.
Internal factors, in addition to financial performance, include the rate of growth and volatility, the seasonality and cyclical nature of sales, size in terms of sales or assets, depth of management, geographic market presence, customer concentration, types and diversification of product or services, and intangibles such as name and reputation, customer base and assembled workforce.
Since the business owner cannot exert any control over the external factors, in planning for the maximization of enterprise value the owner should identify internal factors that can increase the value of the business as well as factors that represent potential risk.
The product of this effort should be translated into a written business plan that will serve as a road map for the future direction of the company. The plan should include performance objectives for the various financial and operational factors so that the company’s progress can be measured, as well as strategies for accomplishing these objectives. Further, the plan should discuss strategies for minimizing risk.
The planning process may result in the realization that additional funding will be required in order to achieve the desired financial objectives. The owner must assess his willingness to assume the related risk as well as determine whether he has the required time horizon to achieve the desired objectives.
Consideration should next be given to planning for the owner’s future exit strategy. It is important during this phase to involve other key professional advisors. These include corporate attorneys and trust and estate attorneys to assist in drafting shareholder agreements, as well as personal wills and trust documents; insurance specialists to assist with writing the appropriate types and amounts of insurance; and tax consultants to assess the tax implications of alternative strategies.
With this team in place, alternative strategies may be developed to determine the best exit strategy for the particular owner. Assuming that there are other current owners of the business, one possible strategy could be to transfer ownership to another owner. Such a transfer can be effected through a buy-sell agreement. This is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business or chooses to leave the business.
Another strategy is to transfer the ownership interest to other family members through either an outright sale or the gifting of interests over time as part of an estate planning strategy.