Loading Contents...

Want to receive new business listing alerts by email?

Both, But One Matters More

Learn How Assets and Income are Factored Into Business Valuation

Image with fine gold coins

While this may sound like an odd question, rest assured you will encounter arguments for both answers while you’re in the process of buying or selling a business. Before we get into the discussion, imagine this scenario…

Bob and Mary walk into the bank to pay their respective business loans. Mary gives them a check and gets a receipt. Bob, on the other hand, wheels in a huge piece of equipment he uses to produce his widgets. He informs the teller he wants to pay his loan. When she asks for his payment, he points to the equipment and says, “I’m going to give you that production unit. it’s worth more than the money I owe”. Do you think the bank will accept it?

Assets do not pay the bills!

Assets are a means to generate revenue. An asset-rich business that does not generate profitable sales isn’t really very valuable beyond the market value of those assets. Assets do play a role in third-party financing. A lender wants to know that the assets, if they can be liquidated, can cover the loan in case your profits can't. But if you have to liquidate the assets, they rarely sell for what they’re valued for in the overall deal.

Obviously, some businesses need assets to generate revenue, but the majority of small businesses for sale don’t have a lot of assets. Many service businesses have none at all outside of basic office equipment.

On the other hand, the more profit the business generates, the more it will have available to pay you, service debt, invest in the business, market the company, or pay for new equipment to grow the business.

As you look to buy or sell a businesses, First Choice Business Brokers can show you how its proven valuation model assigns weight to assets and income.