How Your Balance Sheet Impacts Business Value

Your Business Valuation is Effected by Your Balance Sheet

A balance sheet is one of the most common starting places for buyers when attempting to assess the value of your company. The following items that flow through your balance sheet may impact the value of your business more than you think. Business owners should consider the following aspects of their balance sheet when deciding to sell:
 

Capital Expenditures
Most businesses would expect to see relatively consistent annual capital expenditures. On the other hand, a company that is growing or has growth plans would typically have capital expenditures that are greater than the average depreciation expense. This shows investment in the business with stated growth plans that are rather aggressive, but are not matched with corresponding historical or planned increases in capital expenditures. This shows that the company is just hoping for growth instead of truly creating it….
 

Remember, ultimately, it is a metric known as free cash flow (FCF) that buyers are looking for in your business. FCF is the measure of how much cash a business generates after accounting for capital expenditures, such as buildings or equipment, and is the cash that can be used for expansion, dividends, reducing debt or other purposes. Therefore, while profitability is one measure of the value of the business, FCF is ultimately just as important. In simple terms, know the difference in your business between the capex that is required to maintain current profitability and the capex required for any projected growth.
 

Redundant Assets
Redundant assets are assets that are included on the balance sheet (owned by the company), but are not required for the ongoing operations of the business. Some examples of redundant assets are:
 
• Marketable securities held by the company in a brokerage account
• Corporate retreat or vacation home
• The land and building that the company operates from
• Cash surrender value of life insurance policies
• Golf course membership
• Cash
 
…The reason these are considered redundant, or excess, is because if any of them were removed from the business, the business results would not be unduly impacted and should the business be sold, these assets would not likely be included in a business transaction.
 

Real Estate
Corporate-owned real estate has more to do with a business owner’s overall wealth than it does with the value of the business. Many business owners we deal with also own the commercial real estate from which their businesses operate. Generally, business owners seem to be in tune with the value of their real estate holdings, but not necessarily how the real estate can impact the value of their business.
 
Sophisticated purchasers will attempt to purchase the business and real estate from a business owner and proclaim that the business requires the premises to continue operations, so they should be sold together as a package. While that may be true, it is extremely important to value each asset separately – the business as one asset and the real estate as the second asset…
 
Get a Balanced (Sheet) Perspective
We’ve all heard that numbers don’t lie, but they also do tell a story. Be sure your balance sheet is telling the best possible version of your business’ story when you’re deciding to sell. The impact on your business valuation could be significant.
 

To read the entire article, written by Equicapita Income LP, click HERE.
 
The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $750,000 to $25,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.