How To Find Out If Your Company Is Worth More Dead Than Alive.  

Most business owners I speak with assume their company is worth more than its liquidation value. There have been a few cases, though, where it wasn’t.  When that happens, it’s usually due to cash flow and might be impacted further by taxes. For example, one client had to recapture accelerated depreciation credits if he would have sold at that time, resulting in essentially no after-tax proceeds to him if he sold.  He decided to continue operating the business and make some adjustments in the next couple of years to improve his company’s “sellability”. It would’ve been easier if he had known what his situation was prior to that two year period. 

Most valuation reports that provide an estimate of Fair Market Value state that “This report is being prepared assuming the company is a going-concern”?  This is to distinguish it from a company that is in liquidation. What does this mean exactly?  What is fair market value, anyway? 

Fair market value – the price at which an asset or service passes from a willing seller to a willing buyer.  It assumes both are rational individuals with command of all of the relevant facts and neither are under any pressure to trade.

When wouldn’t you be selling at a Fair Market Value.  For example, if we have entered into a Buy Sell Agreement we probably have a formula to arrive at the price.  It may be an attempt to arrive at the Fair Market Value but it will likely define assumptions that will be used.  Similarly, in an eminent domain situation a township may wants to buy a homeowner’s property to build a road.  I’ve seen those say they are using fair market value, but ultimately, there was no real free market transaction in some deals because the government entity can force the issue. 

But what is liquidation value? It is defined as the cash generated by terminating a business and selling its assets individually.  The liquidation of equity is the proceeds of the asset sale less all company liabilities. 

In most cases, this is less than the going concern value which is the present value of expected future cash flows generated by a business. Make a note to yourself that the future cash flow will take into account the tax impact on those cash flows if you are a seller.  Also note that there are a lot of different valuation methods used for private company reports, and there is some bias in every one of them.  The price you ultimately will get for your business will be based on (among other things) whether the buyer is a strategic buyer, a good fit with your business, buying a major player in the region or a smaller one, etc. The assumptions go on from there.  What should be included in the assumptions for the future stream of cash?  What discount rate should be used? Is there a premium that would make this seller worth more to this buyer? 

Depending on the assumption used, the price of a company can vary widely.  When is a company worth more dead than alive? When the present value of expected future cash flows is low and the company’s liquidation value equals the fair market value. This is usually the case when a company is no longer growing and the cash flows are low to start with. 

It is always valuable for a business owner to know what his company is worth, whether he or she is currently thinking of selling or not.  

As always, if you would like to discuss this topic, your business valuation, your value drivers, buying or selling, feel free to reach out to me at 224-688-8838 or email me [email protected].   

Alison Hoffman

Alison Hoffman

has more than 25 years of experience in strategy, operations, mergers and acquisitions and delivering business-to-business client solutions. Her areas of expertise include managing operations for profitable growth, organizational design and strategy activation. She brings a wealth of experience through her work in evaluating, valuing and purchasing over 30 companies, leading company-wide cultural and business integration projects and consolidating best practices among business processes and corresponding computing systems. Read Full Bio