There is a reason a fair portion of the accounting business is dedicated to mergers and acquisitions. The process of correctly valuing a business is of considerable significance, especially when the interests of shareholders are taken into consideration. How much is a company worth if it generates significant sales on a regular basis? Can future income be valued fairly? What about the company’s assets? Do they have a value? If so, how much? What about future value?
While some of these questions are fairly answered by the share price of a particular enterprise, the truth is arriving at a fair value is less science and more art. More often than not, all the accountants and lawyers end up arriving at the answer they probably knew when they started. A business is worth what the buyer is willing to pay for it.
What many business owners overlook when they are valuing their companies is the value of their intellectual property. An established brand, recognizable logo or unique product design can be worth far more than many owners or even shareholders think. For one thing, valuable trademarks and copyrights can be licensed. Patents can be exploited in numerous ways beyond simply manufacturing and marketing.
Many businesses discover they have intellectual property that has never been exploited. Training materials, for example, can be of use to other enterprises due to the cost of creating new materials from scratch. The time and expense involved might exceed what the original owner of the materials is willing to offer as a licensing fee. These assets shouldn’t be overlooked.
While it is true some companies are purchased so their net operating losses can be applied to a successful company’s taxable income, a company that has significant cash flow is always likely to fetch a premium at market. The reason is cash rich businesses can offset the paper-locked nature of profitable but slow-closing enterprises like film productions, construction and research and development. Very often, one will pay for the other and make both more valuable in the long run.
There are many ways to value a business. The key is to avoid missing the assets of that business that may turn out to be far more valuable than first believed. Those assets are often the difference between a money-losing proposition and a major gain.