Tuesday, 20 March 2012

Dispelling the myth about assets and inventory

When both the seller and buyer focus on the issues at hand and stay away from myths, common ground can usually be found that gets both parties what they want.

A popular myth is that furniture, fixtures, equipment, inventory and other assets are always “add-ons” to business evaluations.

This is not true.  The real value of a business is based on its cash flows; assets simply are the tools required to generate the business’ sales and earnings. 

Assets and inventory are considered when a business is being sold in less than ideal conditions, such as when the company has no profits or cash flow.  Problems then arise in establishing the worth of those items and typically, buyers usually aren’t interested in these businesses because the seller already has proven that the company hasn’t made a profit.

One of the most effective approaches to establish value is by the ‘Cash Flow Method’. 

Start by allowing the Seller to paint a picture of the business’ true profitability.  Buyers typically are comfortable with this method because, at the end of the day, although they are buying a company, what they are really are buying is its cash flow. 

With an understanding of a business’ actual cash flow, different multipliers can be applied to determine a fair market range of value for the business.  Multipliers vary depending upon the type of business, size of market share, new products in the pipeline, key personnel, diversification of customer base, and many, many more.

Unfortunately, establishing a business’ value is not always easily answered.  A business broker is a professional that Sellers and Buyers should turn to for assistance when deciding to sell or buy a business.  By allowing a skilled Broker to do their job they will not only help with value recommendations, but assist in confidentially marketing a business for sale and negotiate a win-win transaction.

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 
William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.


  1. Good points - have you considered making a video of this to demonstrate things more clearly?

  2. Thanks Jack;
    Yes, I have considered it. It is likely something I will look into further in the more distant future.