Valuing a business with intangible assets but no income

It goes without saying that the best way to value a business is based on its earnings. But what about companies that currently do not generate income, e.g. due to a temporary closure? Surely, there is some value in all those assets the company controls?

This is indeed the case. If the income stream is insufficient or stops for some reason, you may want to review the values of business assets.

Consider a restaurant that has been closed by its current owners temporarily. Even without income, there are some assets that may prove highly valuable once the business re-opens its doors. Among the most common are the liquor license, conditional use permits, special entertainment licenses and the like. Given the limited number of liquor licenses granted, such an asset is very valuable, especially to a prospective business buyer who will not need to struggle in order to obtain a new license.

But what is the best way to value such assets and how does this differ from valuing an entire company? When an operating business is being appraised, you would usually be less concerned about the values of individual assets. After all, all these assets are used to generate business income. So by focusing on the income stream and business risk, you can determine the overall business value. This, of course, would include the values of all the assets together.

This is the example of valuing a business with its assets in use, committed to produce the income for the owners. If the business income cannot be readily assessed, then you need to resort to valuing assets piece meal.

One way to do this is to estimate the replacement costs for the assets in place. What would it cost the owners to go out and procure that liquor license? You should consider both up-front cost and time, i.e. lost business earnings. If you don’t have the license already, you may need to pay a premium to get one. Plus the time it takes to get a license is the time you can’t serve the customers. You can discount the income stream from such lost earnings to figure out the additional value the existing license represents.

The same argument holds for all the other valuable assets. It takes time and money to rebuild the assets needed to open a business and start generating income. One way to estimate the replacement costs is check the market in your area. Brokers usually have a good idea of the prices for each type of intangible asset as well as the time and effort needed to obtain one.

Once you have this information gathered together, you can estimate the total value of the assets in place and attached to an existing business. With that figure in hand, you can decide whether the non-operating business is more valuable than rebuilding the asset base from scratch.

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