Everyone understands business value enhancement as a positive, but what does it really mean?
Improving the balance of assets, revenues, cash flows, and margins of a business are some obvious value enhancement tools and techniques, but these can be difficult to accomplish. Depending on the industry and market, these value enhancements may be beyond the control of the business owners. In this article, we will examine several other factors that enhance business value that are generally easier to achieve.
In addition to the value enhancement tools and techniques previously mentioned, three additional business value enhancement strategies can significantly impact the value of a business to a potential buyer:
As noted in a previous article, going concern value will always be greater than liquidation value because an intact, fully operational business includes the value of future revenues.
Outside of greater assets or greater revenues and margins, business value enhancement comes down to the value of intangibles. In a merger or acquisition (M&A) transaction, synergy may also play a role. If the business will fill a gap or otherwise provide an operating synergy for the acquiring company, its value to the buyer will be enhanced. In these types of transactions, the enhanced value is investment value to the specific buyer—not market value. The value of the acquired business will be both the tangible and intangible assets and goodwill—which represents the additional, synergistic value to the purchaser.
Particularly in the case of a privately held business, a number of intangible assets aren’t recorded in the financials and can’t be added to the balance sheet. The value of an established customer base and workforce and contractual agreements provide value above and beyond the tangible book assets. This value is not captured in the balance sheet and is only booked when the business is sold through an M&A transaction.
For other types of transactions, the enhanced value of the business can be established with a business valuation, which considers cash flows, future output, the industry, and every factor that contributes value (or erodes it). A full business valuation will capture the value of both the tangible and intangible assets, as well as future revenue potential from the existing assets. Depending on the reason for the valuation the company can determine the value of their company from the view of a neutral third party, or determine the value of the separate assets of the business. While the fair market value business valuation does not look at the synergistic value of the company, it can provide a wealth of information on how the market sees the value of the company.
At Valentiam, our valuation specialists are experienced in all valuation methods acceptable in accounting practice. We bring collective decades of expertise in valuation and transfer pricing to every project. Give us a call to see how we can help you with your business valuation and transfer pricing needs.