Your Business Mentor | Ray

Small Business | Home Business | Start-up and Growing Advice

Business Valuation for Service and Professional Firms – When You Have No Assets

Business Valuation is hard enough for a small business with hard assets like tools, equipment and commercial vehicles. But … how do we fairly value the small to mid size business with few hard assets and many intangible assets?

What if the hard asset business and the service business both had the same Net Income? Does the hard asset firm automatically get the higher small business valuation?

Not necessarily, and you service and professional business owwners can take some positive steps to insure a much higher valuation for your business. Have you ever asked yourself, “What is my business worth?”.

This is very important even if you do not plan on selling your business. For example, getting an accurate business valuation is useful in securing business lines of credit and other types of business financing, in adequately funding buy / sell agreements between partners, retirement planning and in divorce settlements.

small business valuationYour Business Mentor Ray found some interesting points related to the topic of intangible assets and business valuation within the recent article by Denise Deveau, of the Postmedia News.

“Intangibles can be tricky,” confirms Reg Nordman, managing partner for Rocket Builders in Vancouver, a company that works with venture capital firms and valuators to help companies expand. “In those cases, valuations can turn into a long conversation with financing companies. And sometimes it’s hard to get traction.”

Contracts, Contracts, Contracts

At the risk of repeating myself, get your customers / clients on contracts. Keep them current and enforce them. Too many small service firms operate in a very casual way with their customers. This has a negative effect on the long term valuation of their business.

“Patti Daum, partner advisory services group for Grant Thornton LLP in Vancouver, says that one good practice for companies trying to improve their valuations is to establish contracts with clients to ensure transferability to potential purchasers. “If you bolster the amount of repeat and annuity clients, you increase the value of your business. It’s all about reducing risk.”

One thing she says she has discovered when working with firms with intangible assets is the value expectations of the buyers and sellers can be quite different. “Owners often have an inflated idea of their value. But the reality is the bulk of the value for any professional services firm is intangible. Beyond your people, your brand and your customers, it’s some computers and office furniture.”

Five Types of Intangible Assets to Emphasize

  1. Marketing Related Assets – Trademarks, Domain Names, Google Places and Google search Rankings
  2. Client Lists – The value of this intangible asset is much greater if the client list is backed with current contracts – otherwise it is more of a prospect list
  3. Business Related Publications – This can be any professional journal articles, books published, or videos that have and will continue to add value to the business
  4. Intellectual Property – Any of these items both intellectual and technology related add tremendous value
  5. Business Operational Contracts – Here you are looking at valuating licenses, exclusive distribution rights, Franchises contracts, and any royalty or licensing streams of revenue. Be sure to include Non-Compete contracts with your key employees

Raising Money – How your Business Valuation Hurts You

One of the most difficult things for most small businesses is getting bank financing for working capital or for business expansion. This is even more difficult for the service business owner who finds his or her small business valuation is is held down by low levels of hard  tangible assets on the balance sheet. Banks want lots of assets to to lien before granting financing. Denise Deveau, of the Postmedia News, writes …

“Valuations are always a bit of a conundrum for Etienne Borgeat. As co-founder of PCO Innovation, a specialist in product life cycle management services, he has spent 11 years building up the business to a global success story with 500 staff and a solid client list.

“Having no tangible assets always makes it difficult with banks. And we don’t have equity in branding, intellectual assets or software. But at the same time, we don’t need huge investments to buy equipment,” he says.

Even when they were seeking financing for a large acquisition a few years ago he says, “We had to take a loan out on our existing business because we weren’t able to valuate the company we were acquiring.”

One of the best ways for the service business or professional firm to raise capital for operations or expansion is to utilize accounts receivable factoring. This will work for those firms that have credit worthy, business to business clients with regular billings. The other factor is to make sure these clients are on current contracts.

This accounts receivable invoice financing is short term, and relatively expensive, but it is easy to arrange and you can use it or not as your needs require. Overall, it is a very valuable tool for the small business with a low business valuation due to the small amount of tangible assets on your balance sheet.

Service Business Valuation Summary 

The low business valuation most service businesses get is due to more than the lack of hard assets. Owners of these small businesses need to be proactive in documenting and clearly stating the value of it’s marketing assets, intellectual property assets, business contract assets and client lists.

Tell the story of why you are profitable and the intangible assets that make that happen year after year. By doing so you can can greatly enhance your small business valuation by working hard at these steps.

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