Understanding the value of your small business is essential if you plan to expand or sell your company.

In the early days of my family business, I remember relatives selling their businesses exclusively on the basis of inventory and current sales. Inevitably, the buyer would come away with a genuine bargain. Why? My relatives invariably forgot one of the most basic considerations when conducting such a transaction, namely the business’s true worth.

Business owners looking to sell or expand their operations via acquisitions, partnerships, or the raising of equity capital should ask themselves three related questions:

1. How do I determine the true value of my business?
2. How much is my brand worth?
3. What are my intangible assets?

 

The last two are a function of the first, which should give you some idea of the importance of business valuations for companies of all sizes. Calculating a company’s fair-market value is fundamental to a variety of business activities, including communication between management and investors, planning and providing equity-based incentive compensation, gift and estate tax planning, and litigation support.

Business valuations also serve an important function for startups, providing a foundational financial structure and setting a tone for the future.

As noted above, business valuations are absolutely critical in the cases of mergers and acquisitions, partnerships, and equity investing. In the latter case, banks and equity investors often rely on the unbiased opinion of an independent appraisal report when considering whether to provide financial support to a company.

Among the most important elements of the value equation are intangible assets, which are defined as assets that are not physical in nature.

The most common types are trade secrets (for example, customer lists and know-how):

• Copyrights
• Patents
• Trademarks,
• Goodwill

 

Your brand, location, and everything that brings value to your business—community involvement, location, and name—can be defined as intangible assets.

Brand equity is among the most significant intangible assets in that it drives sales.