The High Value of No Assets in a Business Sale
What is the value of a business having no assets? Think about the changes that have taken place in business over the last decade or so. The balance sheet of a good and strong business of yesteryear might look completely different to todays businesses. Intangible assets & goodwill reign supreme in the todays economy.
Intangible assets & goodwill are now viewed with increased importance when completing business valuations. The Transport & Logistics sector provides a great example of how thinking has moved in recent times. Historically, a Transport company with a truck fleet was purchased based on the market value of the trucks, this is less common now with most large transport transactions using a profit multiplier as the valuation methodology.
The key reason behind the move away from using fixed assets as a driver for valuations has been the trading bank’s view that business profitability and cashflow is the most important repayment characteristic for any company, from a banking perspective.
The same mindset is now prevalent in rural banking where historically the value of the land asset was the key item in deciding whether to advance a bank loan. Today, positive cashflow and profitability are viewed as being more important and if those numbers do not meet the bank’s repayment criteria, the land asset values become largely irrelevant.
For mature and traditional businesses, goodwill is the cashflow generating ability of a company over and above their asset value.
Think about this:
Uber - the world's largest taxi company owns no vehicles.
FaceBook - the world's most popular media outlet creates no content.
Amazon - the world's most valuable retailer has no inventory.
AirBnB - the world's largest accommodation provider owns no real estate.
Balance sheets, once dominated with tangible assets such as property, plant and equipment now look different. So what has replaced it? Intangible assets: brand, content, data, know how, confidential information, design, inventions: in short intellectual property.
Banks relying on security from tangible assets such as plant, equipment and real estate, most of which are becoming irrelevant to the business’s performance, are now looking at the dominance of goodwill/profitability/cashflow and the ability to repay as more important than the underlying assets.
When preparing a business for a sale, the priority needs to be generating documents (financial statements and forecasts) that confirm and illustrate the profitability and cashflow of your business. A fixed asset list, whilst important, will play less of a part in ascertaining the value of the business. If you want the purchaser of your business to have the ability to get bank funding, they will need robust evidence showing the profitability and cashflow of your company and the bank will be less interested in the tangible/fixed assets.
There is a clear trend that new businesses are moving away from owning fixed assets and instead are becoming experts in inventing/innovating, gathering data and implementing new processes/platforms that generate an intangible asset value for their investors.
