Establishing the physical asset value of a business is a fairly straightforward task. But what about the value of intangible assets? Furthermore, what about a service business that has minimal to no assets, physical or otherwise? Thankfully, assets are not a requirement for a business to have value. Profit, or the potential for profit, is; so, let’s consider how to value a business with no assets.
Option 1: Market Comparison
Market-based business valuations calculate your business’s value by comparing it to similar businesses that have previously sold. This method applies well to a business with no assets, but comes with the challenge of identifying sufficiently comparable competitors (who would presumably also have no assets.) The helpfulness of this comparison also depends, of course, on your access to sufficient market data on these competitors.
There are two main approaches to market-based business valuations:
- Sales-based: derives a sales multiple by comparing the company’s revenue to the sales of a similar company that has recently sold.
- Profit-based: derives a profit multiple by comparing the company’s profits to the profits of a similar company that has recently sold.
Option 2: Earnings
Earnings-based business valuations value your business by its ability to be profitable in the future. This method is certainly helpful for a business with no assets, and is also best suited for stable, profitable businesses.
There are two main earnings-based approaches:
- Capitalization of Earnings: calculates future profitability based on cash flow, annual ROI, and expected value.
- Multiple of Earnings: calculates a business’s value by assigning a multiplier to its current revenue or EBITDA. (The appropriate multiplier varies widely depending on the specific industry, current market trends, and economic climate.)
Option 3: Cash Flow
Discounted Cash Flow (DCF) or income-based valuations calculate a business’s value based on its projected cash flow, which is then partially discounted to account for a buyer’s risk.
Bonus Option: Intangible Assets
Remember that not all assets are physical. Contracts are an asset; as are client lists, partnerships, intellectual property, and brand recognition. Assigning value to intangible assets can be complicated, so a business broker or professional advisor is highly recommended.
Whether you’re thinking of selling your business or just want to know how much your company is worth, it is important to remember that many different factors are involved in valuing a business, and those factors vary significantly by market and industry. Viking’s business advisors are experienced in how to value a business with no assets. If you would like help determining the most accurate price for your business, contact us to request a custom valuation.
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