BUSINESS VALUE vs. UNDERLYING ASSETS
Posted on Feb 1, 2023 4:00am PST
Can you value a business without appraising the underlying assts? The answer is
yes. In fact, most business valuations are not all premised upon any specific
asset values.
Think of a business or enterprise valuation as the circumference of a ball
(soccer, basketball, etc.). All of the assets – current, IP and
fixed – are inside the ball. These assets are necessary to the operation
of the business, the going concern. Thus, the business valuation assumes
that certain of these assets are viable and contribute to overall enterprise
value. Yet, unless there is a specific reason to also isolate and appraise
these assets, it is not a necessary exercise.
What are the reasons which compel or suggest that individual assets should
also be valued? The most prevalent ones follow:
- A business sale – if treated for tax purposes as an asset sale, the
process is an allocation of the purchase price. Each of the fixed and
IP assets should be appraised at fair market value. Thus, a new depreciable
basis is established. Any remaining value over and above these asset values
is the residual or goodwill of the enterprise.
- An asset sale – similar to the above, where the buyer can assign
market value to each asset for future depreciation. Often, this “new”
balance sheet” is reflecting IP value for the first time, since
internal costs to create IP are normally expensed and not capitalized.
- Corporate form converted from a C to S (or LLC) – a business valuation
is needed for the new “form”. Optimally, the assets are also
valued for these reasons:
- Accurate calculations of gain or loss are made when individual assets are
disposed or sold
- IP value can be placed on the balance sheet to show potential buyers
- In a Chapter 11 bankruptcy when the court requires both going concern value
and orderly/forced liquidation values for the assets. This latter analysis
should reflect a Chapter 7 shutdown of the business; it sets a parameter
for determining how various debtors might be paid if the business no longer exists.
- Asset transfer from one corpus to another, each with some common shareholders.
While the goal is to minimize value to avoid taxes, the value(s) must
be supportable.
- Transfer pricing studies (IRS Section 482) may involve the value of IP
transferred overseas and a supportable royalty rate charged between related entities.