Every business has three assets. Each type of asset drives business value and has its own matching risk. The value of a business is underpinned by the value of its hard assets.
Tangible Assets
Tangible assets are the things you can touch. Also known as ‘hard’ assets, these assets are the tools and equipment a business uses to make sales of services or products. These are the trucks for a delivery business, or the tables in a restaurant. They can be the chairs in a salon or the widget making machine in the factory.
Intangible Assets
The second asset owned by every business is its identifiable intangible assets. These are the things that make the business valuable, but you can’t touch them. This might be the restaurant’s killer location in downtown Calgary with lots of foot traffic. It could be the dedicated workforce of the veterinary clinic that has been with the clinic for over 20 years. An intangible asset owned by a salon might be the contract for the famous stylist with a huge client list that everyone is dying to get in to see.
Goodwill
The third asset owned by every business is its goodwill. This is an unidentifiable intangible asset. Goodwill is what remains from the value that has been discovered through an analysis of the cash flow of the business less the value of the tangible and identifiable intangible assets.
Sometimes goodwill can be found on the balance sheet of a business. But it only appears there if the company has bought another company and has paid more than the sum of the values of the acquired tangible and identifiable intangible assets. Most small businesses won’t have goodwill on their balance sheet.
Just because goodwill doesn’t show up on the balance sheet, doesn’t mean that the company doesn’t have it. If goodwill is not there, it just means that the company has not bought another business or if it has then the buyer didn’t overpay.
Asset Risk
Each asset type will have a matching risk linked to it. In total, the three assets comprise the total risk of the business. The intangible asset values usually comprise most of the risk in the business.
In the case of a bankruptcy (fire sale) only the tangible assets will have any value. In a fire sale, the only thing that can be sold is a business’ hard assets. It is nearly impossible to sell intangible assets in a hurry.
Calculating the value of your business is what we do best.
What are the assets in your business? Call 403-479-6097 to learn more.