When was the last time that you took a look at your company assets? If you are a family owned business, perhaps these are “the family jewels.” Like jewels or other items of value, the real value is based on how much somebody will pay to buy these assets at a specific point in time under specific terms and conditions with acceptable consideration. The valuation changes dependent on many factors related specifically to that buyer and their needs.
Determining valuation for a sale is actually a lot easier than trying to distribute value if the family owned company is being inherited, broken up or dissolved.
The challenges are not that different than the problems that farmers used to face. At one point in history and in many cultures, when the farm was passed on, the land, tools, livestock and other assets were divided among the eligible descendants. The challenge was that the divided property might not be enough to sustain a family or make a living. The heirs were destined to challenges due to the divided property. Today, many farms are treated more as a business than just a livelihood. It must be the same with a family owned company.
A prescribed method of conveying or dividing assets in a company can alleviate a lot of problems later. As stated in the blog Till Death Do Us Part, starting with the end or potential end in mind is great planning. However most people starting a company are so focused on getting started and growing the company that exit strategies are not even on the radar. It should be, as it will change the way in which you grow the company.
Is the objective of the company providing a lifestyle and wealth accumulation for the current owners or are you building value that can be transferred or sold? Your choice or one of several others will drive the accumulation and expenditure of assets in your company.
If it is lifestyle and wealth accumulation without consideration, following the point at which you exit the business you will invest in what you need to do to drive business today in the most cost efficient manner possible. Optimally, most assets or resources will be exhausted or fully utilized when you exit. You will make your wealth now, without residual considerations. If you are able to sell the company (without you), the assets or a book of business at the end, that is gravy. In this case you are going to keep the family jewels primarily to yourself and valuation of assets is primarily for insurance and financial requirements.
If you are building the company for sale or transfer, you will take a very different approach. You are investing in the value you will realize when it is sold or transferred, and earning a living while you work it. Your return on investment should be greater when everything is added, if you have built not only assets but an entity that is desirable and worth paying for.
Now each investment into an asset must not only work for your company, efficiently enabling your personal business as a part of the company, but also has to become a part of an infrastructure that can be sold that makes the entire machine work and continue to create value whether or not you are a part of the picture. In this case the family jewels are in the treasury, constantly being revalued, analyzed and considered for the value in the portfolio.
The way that you value the assets is dependent on the reason. If it is for insurance or financial reporting it is different than when you are negotiating a sale or a transfer. Your personal production and contributions to the organizations may have little if any value in a sale or a transfer if you will not be continuing with the company. If the company is being divided into components, it will have a different value per component and in total than a sale of the whole.
Keeping a watch on the value of the assets of the company will help in planning and preparation for the future state of the business and the company.
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