The value of business should be assessed before liquidation begins. Assessing the value of a business is called valuation of the business. Having a business valued before liquidation is important because the economic worth of the assets, such as equipment, and of the business as a whole has probably changed since the assets were purchased and the business was started or since the last valuation was done.

Valuing a business involves numerous factors, such as:

  • What the business owns and what it owes
  • The business's income
  • What formula or method should be used to determine value
  • The valuation date

Business valuation is usually a very complex process, and more likely than not it will require the use of experts, appraisers, and people who are experienced in business operations.

What Does the Business Own and Owe?

There can't be a valuation of any business without knowing what it owns, which includes:

  • ''Tangible'' property, like inventory, office equipment and manufacturing machinery, and
  • ''Intangible'' property, like patents, trademarks and ''goodwill,'' that is, good customer relations

What the business owes (''liabilities'') is just as important as what it owns (''assets''). ''Liabilities,'' generally, come in the form of money, goods or services that the business owes to others. So, a company's value is sometimes viewed as: the sum of its assets minus the value of its liabilities.

How Much Money Does the Business Make?

Usually, the profitability of a business is a way of measuring its value. Profit is determined by subtracting the business's expenses from its income.

Expenses include the direct costs of producing the goods or performing the services that the business sells, as well as items like overhead-- expenses that are necessary to keep the business running-- such as rent and utilities.

Income is the total amount of cash received from the sale of goods or services and other business-related activities, such as investment income or gain from the sale of business assets, like equipment.

Because of the numerous ways in which ''profit'' can be calculated, and because businesses differ greatly on how ''income'' and ''profit'' are recorded in its books, you need to carefully read the business' financial records and books so that ''profit'' can be determined accurately.

Valuation Methods

There are several methods that can be used to value a business, but the two most commonly used are: the book value method and the earnings or market approach.

The book value method is based on the values of the assets and liabilities as they are listed on the corporate books. The value of assets on the books is frequently the original cost of the asset:

  • Minus depreciation, which is the decrease in value that is caused by age or normal wear-and-tear,
  • And adjusted for things such as an increase in value

The earnings or market approach is based on the market value or earning capacity of the business: what an outside buyer or investor would pay for the business, taking into account the future earning capacity of the business.

Date of Valuation

A business in liquidation can be valued for several purposes, including:

  • Determining whether the business is insolvent and whether filing for bankruptcy is warranted
  • Assessing the value of the assets so that they are sold for a fair price
  • Assessing the sale price of the business for possible sale of the business

A current valuation of the business and its assets is necessary because the value of the assets and the business as a whole may have increased or decreased significantly since the assets were purchased and the business was started or since the last valuation was done. In order to get a fair price, the seller has to know what the assets and the business are worth. So, any business should generally be valued as close to the time of liquidation as possible.

Questions for Your Attorney

  • What kind of records or information do I need to get in order to determine how much my business is worth?
  • In the liquidation of a business, can a buyer and a seller of business assets agree on a price without obtaining a valuation of the assets?
  • When should a business that is winding up obtain a valuation of the business?