On many occasions, the businesses or companies that belong to individual entrepreneurs end their "life" when the entrepreneur retires, because there are no "heirs" or those that exist are not interested in their continuity or cannot, for whatever reason, take over the same. In this situation, the entrepreneur may consider selling the business or the company.
Unlike commercial companies, whose capital is represented by shares or participations, in the case of individual companies the sale must be made taking into account the value of all the assets (goods and rights) and all the liabilities (obligations) that comprise the assets of these companies. Thus, the valuation of the patrimonial elements corresponding to the company constitutes the first problem that the individual entrepreneur must face when selling his company.
Three simple methods to value a business / company
Leaving aside the diversity of valuation methods that we can find in any book dedicated to the subject in question, we can say that there are three widely used and easily applied methods:
- Net Book Value; Net Appraised Value; Update Value of expected future Benefits.
1. NET ACCOUNTING VALUE
Once the sale of the business or company has been decided, the entrepreneur must prepare a balance sheet referring to a certain date (for example, the last day of the immediately previous month). Starting from said balance, the net book value (VNC) will be determined by means of a simple arithmetic operation:
TOTAL NET REAL ASSETS - LONG TERM DEMANDING - SHORT TERM DEMANDING = NET ACCOUNTING VALUE
The TOTAL REAL NET ASSETS will consist of the following elements:
a) Net real fixed assets
REAL ASSETS - ACCUMULATED AMORTIZATION - PROVISIONS FOR ASSETS = TOTAL REAL NET ASSETS
When speaking of real assets, we refer to the set of assets and rights that, remaining in the assets of the company for a period of time exceeding a financial year, undoubtedly correspond to the ownership of the entrepreneur.
Thus, for example, in the case of using assets under a financial lease, given that their effective ownership does not correspond to the entrepreneur but to the lessee company and that, in the event of the company being sold, the subrogation in said rights It is not automatic, but depends on the prior agreement between the said leasing company and the future buyer. At the time of proceeding to value the real or effective fixed assets, the amount of the assets under a financial lease should be reduced.
b) Inventories
STOCKS - STOCK PROVISIONS = TOTAL NET STOCKS
c) Achievable
CLIENTS AND DEBTORS - TRAFFIC PROVISIONS = TOTAL NET WORKABLE
d) Available
BANKS, CTAS. CTES. + CASH = TOTAL AVAILABLE
So we will have to:
TOTAL NET ASSETS + TOTAL NET STOCKS + TOTAL NET WORKABLE + TOTAL AVAILABLE = TOTAL NET ASSETS
For its part, the LONG TERM DEMAND is made up of all debts contracted with financial entities or with suppliers of fixed assets whose maturity is greater than one financial year.
Finally, the SHORT-TERM REQUIRED will be made up of all debts contracted with financial entities, suppliers, creditors and with the public administration, whose maturity is less than one financial year.
In this way, from the accounting data we will have calculated the value of the business or the company at a certain time. This value will serve as a reference when negotiating the sale with potential buyers.
PRACTICAL EXAMPLE
Suppose that in the year 2000, Mr. Fernando Fernández Fernández, an individual businessman dedicated to wholesale distribution and retail of car accessories, decides that the time has come to sell his company. For the purposes of calculating the reference value of the company, it has its administration staff prepare the Balance Sheet and the Exploitation Account at December 31, 1999 of "Recambios Fernández", resulting in the following equity situation:
ACTIVE
| Gross fixed assets | € 139,000,000 |
| Accumulated amortization | (65,000,000) € |
| Net fixed assets | € 74,000,000 |
| Stock | € 55,000,000 |
| Realizable | € 40,500,000 |
| Available | € 30,500,000 |
| Current assets | € 126,000,000 |
| Total net assets | € 200,000,000 |
PASSIVE
| Own funds | € 61,700,000 |
| Long-term callable | € 54,000,000 |
| Permanent capitals | € 115,700,000 |
| Short-term callable (current liabilities) | € 84,300,000 |
| Total net liabilities | € 200,000,000 |
Regarding the operating account we have the following information:
| Sales | € 300,000,000 | 100.00% |
| Consumptions | € 255,000,000 | 85.00% |
| Operating expenses | € 25,500,000 | 8.50% |
| Total costs | € 280,500,000 | 93.50% |
| Result of exploitation | € 19,500,000 | 6.50% |
| Non-farm income | € 2,500,000 | 0.83% |
| Result of the excersice | € 22,000,000 | 7.33% |
Suppose, also, that we have the following additional information on the elements integrated into the assets of the company:
1. Intangible fixed assets
It includes the amount of the rights to use facilities and furniture under a financial lease.
The deferred financial expenses derived from the operation are included in the item “(27) Expenses to be distributed in several years”. While the counterpart of both items is included in “(173) Long-term fixed asset providers”.
The accumulated amortizations as of December 31, 1999 associated with these assets amount to a total amount of 2 million euros.
2. Property, plant and equipment
The following items are included in this item:
| Land | € 50,000,000 |
| Buildings and other constructions | € 50,000,000 |
| Installations and furniture | € 20,000,000 |
| Computer equipment | € 15,000,000 |
| Vehicles | € 10,000,000 |
| Other property, plant and equipment | € 5,000,000 |
Two plots are included in the “Land” concept. One of them is built and has a value of 20 million euros. The other plot is not built, is accounted for an amount of 30 million euros and is affected by a forced expropriation file that would affect almost 85% of its surface. The effect of this file on the value of the affected land is included in the item “(29) Provisions for fixed assets”, which reflects a balance of 25 million euros.
3. Commercial stocks
This concept includes a provision for the amount of obsolete or difficult-to-market references, the amount of which, 5 million euros, is recorded under the heading "(39) Provisions for depreciation of inventories".
4. Own funds
There are no results, either positive or negative, from previous years.
With all the available information we can calculate the net book value (VNC) of the company as of December 31, 1999 by applying the algorithms described above. So it will turn out that:
TOTAL NET REAL ESTATE = € 62,000,000
This amount is obtained by subtracting from the NET ASSETS that appears in the balance sheet as of December 31, 1999, the amount of the rights to use the assets under a financial lease, as well as the amount of deferred financial expenses. The amount of the accumulated amortizations derived from said assets will be added to the result of this operation. That is to say:
€ 74,000,000 - € 10,000,000 - € 4,000,000 = € 60,000,000 + € 2,000,000 = € 62,000,000
TOTAL NET STOCKS = € 55,000,000
TOTAL NET WORKABLE = € 40,500,000
TOTAL AVAILABLE = € 30,500,000
TOTAL REQUIRED LONG TERM = € 40,000,000
This amount is obtained by subtracting from the DEMANDABLE MEDIUM AND LONG TERM that appears in the balance sheet as of December 31, 1999, the amount of the debt with the suppliers of the goods under financial leasing. That is to say:
€ 54,000,000 - € 14,000,000 = € 40,000,000
TOTAL REQUIRED SHORT TERM = € 84,300,000
Then:
€ 62,000,000 + € 55,000,000 + € 40,500,000 + € 30,500,000 - € 40,000,000 - € 84,300,000
VNC = € 63,700,000
2. ASSESSED NET VALUE
If, once the sale of the business or the company has been decided, the individual entrepreneur concludes that the values reflected by the accounting do not conform sufficiently to the market values corresponding to the goods, rights and obligations that are included in his business assets, you can choose to commission one or more specialists (appraisers) to determine these values.
For this, an inventory-balance referred to a specific date will be prepared previously (for example, the last day of the immediately previous month). Based on said inventory-balance, the net appraised value (VNT) will be determined by means of a simple arithmetic operation:
TOTAL ASSETS NET ASSESSED - REQUIRED LONG-TERM ASSESSED - REQUIRED SHORT-TERM ASSESSED = NET VALUE ASSESSED
The TOTAL NET ASSETS ASSESSED will consist of the following elements:
a) Net real valued assets
ASSETS REAL ASSETS - ACCUMULATED DEPRECIATION - PROVISIONS FOR ASSETS = TOTAL ASSETS REAL NET ASSESSED
b) Real appraised stocks
ASSESSED REAL STOCK - PROVISIONS FOR STOCK = TOTAL ASSESSED NET REAL STOCK
c) Feasible appraised
APPRAISED CUSTOMERS AND DEBTORS - TRAFFIC PROVISIONS = TOTAL NET APPRAISABLE APPRAISED
d) Available
BANKS, CTAS. CTES. + CASH = TOTAL AVAILABLE
So we will have to:
TOTAL ASSETS REAL NET ASSESSED + TOTAL ASSETS NET ASSETS ASSESSED + TOTAL NET ASSETS ASSESSED + TOTAL AVAILABLE = TOTAL ASSETS ASSETS ASSESSED NET ASSETS
For its part, the LONG-TERM REQUIRED PRICE will be made up of all the debts contracted with financial entities or with suppliers of fixed assets whose maturity is greater than one financial year.
Finally, the SHORT-TERM REQUIRED PRICE will be made up of all debts contracted with financial entities, suppliers, creditors and with the public administration, whose maturity is less than one financial year.
In this way, based on the inventory-balance previously prepared and using the appraisal techniques that specialists have deemed appropriate, the appraised value of the business or the company at a given time will have been calculated. This value will serve as a reference when negotiating the sale with potential buyers.
PRACTICAL EXAMPLE
Let's take the data from the example previously developed and suppose that we have the following additional information:
1. Intangible fixed assets
It includes the amount of the rights to use facilities and furniture under a financial lease.
The deferred financial expenses derived from the operation are included in the item “(27) Expenses to be distributed in several years”. While the counterpart of both items is included in “(173) Long-term fixed asset providers”.
The accumulated amortizations as of December 31, 1999 associated with these assets amount to a total amount of 2 million euros.
2. Property, plant and equipment
The effective value of the elements included in this item is as follows:
| Land | € 150,000,000 |
| Buildings and other constructions | € 250,000,000 |
| Installations and furniture | € 10,000,000 |
| Computer equipment | € 2,000,000 |
| Vehicles | € 3,000,000 |
| Other property, plant and equipment | € 1,000,000 |
This represents a total effective amount of 416 million euros. In view of the effective valuation of depreciable property, plant and equipment (the total less the value of the land), the accumulated effective depreciation would amount to a total of 199.5 million euros.
In the concept "Land" two lots are included. One of them is built and accounted for a value of 20 million euros, its effective value being 50 million euros. The other plot is not built, it is accounted for an amount of 30 million euros, its effective value being 100 million euros, and it is affected by a forced expropriation file that would affect almost 85% of its surface. The effect of this file on the value of the affected lot is included in the item "(29) Provisions for fixed assets".
However, taking into account the real value of the land affected by the forced expropriation file, the item “(29) Provisions for fixed assets” should amount to a total of 85 million euros.
3. Commercial stocks
This concept includes a provision for the amount of obsolete or difficult-to-market references, the amount of which is recorded under the heading "(39) Provisions for depreciation of inventories". However, given the effective impossibility of marketing 20% of the inventories accounted for, this provision should amount to a total of 11 million euros.
With all the available information, we can calculate the company's net appraised value (VNT) as of December 31, 1999 by applying the algorithms described above. So it will turn out that:
TOTAL REAL NET ASSETS ASSESSED = € 144,500,000
This amount is obtained by subtracting from the NET ASSETS that appears in the balance sheet as of December 31, 1999, the amount of the rights to use the assets under a financial lease, as well as the amount of deferred financial expenses. The amount of the accumulated amortizations derived from said assets will be added to the result of this operation. That is to say:
€ 74,000,000 - € 10,000,000 - € 4,000,000 = € 60,000,000 + € 2,000,000 = € 62,000,000
This amount must be adjusted based on the differences between the book values and the appraised values corresponding to the items of property, plant and equipment:
Increase in the value of gross property, plant and equipment
€ 416,000,000 - € 139,000,000 = € 277,000,000
Increase in the value of accumulated amortizations
€ 199,500,000 - € 65,000,000 = € 134,500,000
Increase in the value of fixed asset provisions
€ 85,000,000 - € 25,000,000 = € 60,000,000
That is:
€ 62,000,000 + € 277,000,000 - € 134,500,000 - € 60,000,000 = € 144,500,000
TOTAL ASSESSED NET STOCK = € 49,000,000
This amount is obtained by subtracting from the STOCKS that appear in the balance sheet as of December 31, 1999, the difference in more between the accounting amount and the effective amount (appraised) of the Provisions for depreciation of inventories. That is to say:
€ 60,000,000 - € 5,000,000 - € 6,000,000 = € 49,000,000
TOTAL NET WORKABLE APPRAISED = € 40,500,000
TOTAL AVAILABLE = € 30,500,000
TOTAL REQUIRED LONG TERM = € 40,000,000
This amount is obtained by subtracting from the LONG-TERM REQUIREMENT that appears in the balance sheet as of December 31, 1999, the amount of the debt with the suppliers of the goods under a financial lease. That is to say:
€ 54,000,000 - € 14,000,000 = € 40,000,000
TOTAL REQUIRED SHORT TERM = € 84,300,000
Then:
€ 144,500,000 + € 49,000,000 + € 40,500,000 + € 30,300,000 - € 40,000,000 - € 84,300,000
VNT = € 140,000,000
3. UPDATE VALUE OF EXPECTED FUTURE BENEFITS
Finally, if once the sale decision has been made, the individual entrepreneur estimates that neither the net book value nor the appraised value of the assets of the business or the company adequately reflect the expectations associated with said business or company, because there are intangible elements (for Example: brand image, customer loyalty, market penetration, etc.) that are part of its real heritage. In this case, the valuation will be carried out previously estimating the expected future benefits limited to a term not less than three nor greater than the five financial years following that in which it is intended to proceed with the sale of the business or company in question.
Once these future benefits are estimated, the value of the business or the company will be calculated by applying the following algorithm:
VAB = B 1 x (1 + i 1) –1 + B 2 x (1 + i 2) –2 + B 3 x (1 + i 3) –3 + B 4 x (1 + i 4) –4 + B 5 x (1 + i 5) –5
Being B n the expected benefits corresponding to the first, second, etc. financial years following the sale of the business or company. While the i represents the interest rate (as much as one) applied to calculate the updated value.
Type i is generally determined based on the internal profitability of the business or the company. That is, taking into account the benefits actually obtained in reference to the investment applied.
In this way, we will obtain the reference value of the company or business that we want to sell, taking into account not only the inventoried elements of its assets, but also those others that, although not registered, allow it to obtain positive results.
PRACTICAL EXAMPLE
Finally, based on the data from the example previously developed, suppose that we have the following additional information regarding the estimation of EXPECTED FUTURE BENEFITS:
B 1 = € 25,000,000
B 2 = € 30,000,000
B 3 = € 35,000,000
B 4 = € 40,000,000
B 5 = € 45,000,000
Regarding the value of i, it will be the one corresponding to the estimated return on equity (excluding the results for the current year) determined based on the accounting data available as of December 31, 1999 and the estimated benefits. That is to say:
i 1 = (ESTIMATED PROFITS FOR 2000 ÷ OWN FUNDS FOR 2000) x 100 = 4.0%
i 2 = (ESTIMATED BENEFITS FOR 2001 ÷ OWN FUNDS FOR 2001) x 100 = 3.5%
i 3 = (ESTIMATED BENEFITS FOR 2002 ÷ OWN FUNDS FOR 2002) x 100 = 3.0%
i 4 = (ESTIMATED BENEFITS FOR 2003 ÷ OWN FUNDS FOR 2003) x 100 = 2.6%
i 5 = (ESTIMATED BENEFITS FOR 2003 ÷ OWN FUNDS FOR 2003) x 100 = 2.3%
Thus, applying the algorithm to calculate the UPDATED ESTIMATED BENEFITS, the following result would be obtained:
GVA = 25,000,000 x 1.04 –1 + 30,000,000 x 1,035 –2 + 35,000,000 x 1.03 –3 + 40,000,000 x 1,026 –4 + 45,000,000 x 1,023 –5
GVA = (25,000,000 x 0.96) + (30,000,000 x 0.93) + (35,000,000 x 0.92) + (40,000,000 x 0.90) + (45,000,000 x 0.89)
That is:
GVA = € 160,150,000
conclusion
We can check the marked differences between the reference values calculated for the company that you want to sell based on the method applied for said calculation.
VNC = € 63,700,000
VNT = € 140,000,000
GVA = € 160,150,000
What is, in short, the real value of the company? All and none, since each of them has been calculated based on certain information obtained on the composition and value of the different elements integrated into the assets of the company.
So, for how much can Mr. Fernando Fernández Fernández sell his company? For the value that someone is willing to pay for it. That is: for its market value.
