Oftentimes, business brokers are approached by business owners who are thinking of selling a business that has little or no tangible assets. Because there are minimal physical assets associated with the business, owners may think that the value of the business is very little.

This is a common misconception in the marketplace – that the value of a business is somehow equal to the market value of its tangible assets. The reality is that the most critical piece of a business’s valuation is its ability to produce future earnings. This article will quickly examine some of the factors of business value for a company that is profitable but has very little hard ‘assets’.

Selling such a company is very possible but it would be in your best interests as a business owner to work with a business broker who is knowledgeable about business valuation principles and can properly articulate the company value to prospective buyers.

How to Justify Value when Selling a Business

There is an old saying in finance that "cash is king." This is especially true in business valuation and when selling a business. Buyers in the market ultimately are looking for a business that will produce a stream of cashflow to them going forward.

Often, business owners believe that a business with a large pool of physical assets but minimal earnings is marketable based on the "asset value." This is a dangerous assumption to make. Investors in the marketplace typically are not attracted to a business for sale that has much in the way of equipment and assets but does not have the earnings to support a valuation. Again, "cash is king." Having physical assets in a company is certainly great but without the historic profit (or more importantly, potential future profit) then such a business would be difficult to sell.

Conversely, a service business with great revenue and profit history but little in terms of assets can be very attractive to a large pool of business buyers. Such a business is usually examined by buyers that understand that they are buying "future earnings" of the business and they generally want to understand how the profitability of the company will continue even after they take over as the new owners.

As such, buyers of these types of businesses ask important questions about the company, such as:

- What is the future potential of the business? - How ‘clean’ are the financials? - How differentiated or propriety is the service the business offers? - Is there a ‘key person’ involved in the business? If that person left would the business suffer? - What is the market and competition like? Is anything expected to change?

The point is that a business buyer who understands the principles of business valuation would understand that a business with great earnings and a strong outlook (but little hard assets) can still be a great acquisition.

As a seller of such a business, it would be beneficial to you to work with an experienced accountant or business broker to properly understand how to price the business that has little hard asset value.

Financing may be challenging though

Although a business for sale with minimal hard assets may be a good investment opportunity, there are some challenges on the financing side. Canadian banks typically look at securing business loans with collateral. Oftentimes, the value of business goodwill (intangible assets) is not considered in the loan evaluation. Ensure that you have the resources to purchase such a business.