Net Asset Value Or Business Value-Not The Same Thing
Accountants always seem to get lost in the valuation of a business. Whilst this is understandable, it can create problems when a business is sold. Even the Discounted Cash Flow method of valueing a business can be misplaced.
Net asset value is simply the assets, minus liabilities of a business. Businesses are sometimes sold using this value, Whilst few and far between, it does happen. Net asset value is more applicable for tax purposes, but is never a fair indicator of the intrinsic value of a business, albeit an important component.
Some businesses are worth much more than their assets on their books. Take a small fashion designing business for instance. The assets in the business, might be less than $10 000.00, but the value of its owner cannot be quantified in monetary terms.
The discounted cash flow method of business valuations is a more realistic method of calculating the value of a business. Formulas used in this method however, still overlooks the essential components such a skills and talents. Some accounting policies are in place to measure intellectual capital, but remains vague in its application. Copy right and patent laws cover intellectual property, but it still remains difficult to quantify in monetary terms what an individual is worth to a business.
In accounting an employee salary is recorded as a cost, and not an asset. So the loss in income due to a loss of human capital is never measured, only noted. Are employees, costs or assets or liabilities(many are liabilities)? For the most part employees add value to a business.
Does the location or appearance of a business add value? Of course it does. Being located close to banks, corners and parks makes a big difference. A neat tidy appearance of an office also attracts customers. A receptionist with a friendly smile will keep your clients coming.
These aspects should make a big difference when it comes to establishing a true value of a business. Costs have absolutely nothing to do with TRUE value.
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Contact the Author
Sean Goss
sgafc@mweb.co.za