Business valuation: business enterprise value or asset sale?

By established convention, appraisers value companies on the business enterprise value basis. For publicly traded companies, this is the sum of the shareholders’ equity, less cash or cash equivalents, and the total value of debt. This represents the current value of the company regardless of the capital structure. In other words, the levels of debt or equity capital the firm uses.

Most private company sales are asset sales

On the other hand, private companies often sell in an asset sale transaction. This generally includes the value of its long-term assets, also known as furniture, fixtures and equipment (FF&E for short) as well as the intangibles such as business goodwill. As a rule, the seller keeps the accounts receivable, along with the company’s cash assets. You value inventory separately and then add it to the company’s sale value.

Importantly, you should sum the values of debt and equity. That’s because in an asset sale, the buyer expects the company assets to be delivered free and clear.

On occasion, a company can be sold on a stock basis. In this case, the buyer assumes the firm’s liabilities. The equity value of the business in this case excludes the liabilities but includes all short-term and long-term assets.

What type of value are you using?

Given this diversity of business values, you should tell the readers of your business appraisal report what type of business value you have used. For instance, the the person reading your report could make a mistake thinking that you use the business enterprise value. But you meant  to calculate the equity value instead. If the firm uses debt to finance operations, this likely understates the actual value.

Using the recognized terms for reporting business value? Then be sure to spell out what you have actually included in your results. Moreover, all major appraisal standards require that you state what you have included in your valuation calculations.

See Valuation Tour