When getting to know small-business owners, financial planners typically ask about their company’s value at that point in time. Unfortunately, many times, their first inclination is to share their latest bank statement or the amounts of various checking, savings and investment accounts owned by the company. While these are terrific indicators of cash-at-hand value, for many companies in the Valley, especially small businesses, assessing value goes well beyond the dollars and cents that are sitting in bank accounts.
As a company grows, it becomes increasingly important to identify all assets — the seen and unseen — and use them to provide an accurate snapshot of a company’s value. Additionally, knowing the scope and size of all assets can help a company employ and deploy them to create even greater worth.
Business assets are essential to the effective operation of every small business. From heavy machinery and computer systems to trade secrets and patented ideas, assets run the gamut and can include anything to which a dollar figure can be assigned. Even businesses that primarily offer services, such as financial planning, marketing, accounting or legal counsel, have important assets that help comprise the overall value of the company.
Why Do All Assets Matter?
If there is one thing every small-business owner must task himself with, it is having a comprehensive grasp of all business assets. Identifying and understanding value is vital to preserving, maintaining and protecting business-essential assets, as well as efficient disposition of idle assets.
Oftentimes, business owners may see items such as computers and equipment as an expense — something they initially bought and are now spending money to maintain. However, smart business owners should understand how these assets contribute to, or detract from, profit and the overall value and operational flexibility of their company. This insight provides opportunity for:
- Optimal deployment of assets that contribute to margins and profit;
- Efficient disposition of, and cash recovery from, unused assets;
- Tax strategies that depreciate assets and, accordingly, reduce income tax;
- Preparation for asset replacement cycles and potential depreciation recapture;
- Superior analysis of lease versus buy decisions; and
- Lending availability using assets as collateral.
These are just some examples of the power of having a global view of business assets. At the end of the day, assets are essential to generating revenue, optimizing business value and enabling efficient business operations. The more business owners use this information to their advantage, the more well-positioned the small business is for success.
Identifying a Business’s Assets
Before analyzing the impact of an asset, it is important to identify the different types that exist in a small business. Real and tangible assets, such as computers, equipment and cash, are the ones that immediately come to mind.
However, it’s the intangible assets that are often not recognized and are often difficult to place a dollar value upon. For instance, intangible assets can include patents, trade secrets or goodwill. A business’s intellectual property is often a critically important asset, since it is the know-how needed to profitably develop, produce and deliver the services or products to the clients. A business’s intellectual property is often very hard for competitors to replicate and is often a reason why a larger firm buys a smaller firm: It is easier and, likely, less expensive to purchase that know-how than it is to develop it from scratch. Once acquired, that intellectual property can be leveraged many times over by the larger firm because of its greater economies of scale. As a result, the value of the know-how to the larger firm as measured in profits generated can be much greater than the value to the smaller firm, and the larger firm may be willing to pay much more to reflect that greater value.
Putting a Value Tag on Assets
As previously mentioned, many traditional assets are initially recorded on the company books at cost, which is the price a company paid for them when purchased. Nevertheless, the value of such assets will invariably change over time. Some assets may appreciate in value based on market conditions, scarcity or innovative uses of the asset. Other assets may depreciate in value over time, due to age, use and rapidly evolving technology.
Once assets are identified, excellent business records are essential so that business owners can properly track value. It is important to keep track of true value to help create supporting documentation for financial statements or tax returns and determining borrowing power when using them as collateral. Similarly, tracking value helps managers and owners understand how readily company assets can be converted to cash if needed, and the overall estimated value of the business if it were to be sold.
Very often, asset records need to be tracked in accordance with multiple methodologies. For example, there may be one set of rules and standards for financial accounting, in accordance with GAAP (generally accepted accounting principles). There may be another, separate, set of IRS rules for tax reporting. Similarly, business valuation approaches have their own standards and practices for valuing the assets of a business. These tracking methods are each for different purposes and each may be expected to employ different rules, standards, formulations and other factors, yet they are equally important. This is why it becomes vital for a small business to seek the help of an accountant or financial planner. They can put a stake in the ground on valuating these items, as well as their increasing or decreasing value.
Leveraging Assets beyond Their Intended Use
While every small-business owner knows that cash in the bank can be reinvested to help it grow, companies can leverage their assets in unexpected ways to generate income or value for the organization. For instance:
- While construction companies and operators of heavy equipment often purchase machinery to use on the job site, equipment that is not being used can often be rented or loaned out to generate income. Vacant space in an owned office complex can be leased out to generate income. In certain cases, even leased spaces can be sublet to renters, provided lease terms allow for this.
- Office equipment such as computers, laptops, furniture and more — anything idle or no longer needed — can help a business create cash flow or quick liquid assets through sales.
- Even intellectual property can be “loaned” by way of speaking opportunities — both paid and unpaid — that can not only generate cash value but also reputation value in the industry.
The key is to not focus too narrowly on defining an asset. With small businesses, every tangible item and intangible element needs to be valuated to not only accurately measure the business’s value but also to help it grow, create efficiencies and stimulate growth. Oftentimes, businesses have no clear picture of the true worth of their organization, leading to potential missed opportunities and barriers to ongoing growth.
Susan Talbott, MSFS, CPA, PFS, ChFC®, CASL®, is a founding partner of Tempe-based Pinnacle Financial Advisors, which assists individuals, families and businesses with financial planning and wealth management. She is a registered representative offering securities through United Planners Financial Services, a member of FINRA and SIPC; and advisory services through Seros Financial, LLC. Pinnacle Financial Advisors, Seros Financial and United Planners are independent companies.