Unlike large corporations with vast resources, independent LBM dealers must be proactive in protecting and maximizing their business value. Understanding the differences between an asset appraisal and a business valuation helps you make strategic decisions about sustainable growth and succession planning.
A Common Misconception
A business owner recently engaged Stratus to provide a business valuation. During our initial due diligence, the owner asked, “Why are we focusing on cash flow? If I was buying this company, I would just estimate the value of the inventory and fixed assets and offer that amount.” This is a common misconception about how a business is valued and one that we worked to correct by spending time with the owner discussing the difference between the value of a business liquidating its assets and a “going concern” business that will continue operating under new ownership. We asked the owner if the goal of their succession plan was to liquidate the assets or to sell a successful, sustainable business. Once we determined the goal was to sell a successful, sustainable business, we then explained that a buyer is looking to purchase future cash flow. While you need assets to produce cash flow, future cash flow is also dependent on intangible factors such as leadership, operations, and sales processes. These factors are considered in a business valuation but not in an asset appraisal, which is why a business valuation is typically higher than an asset appraisal.
What is an Asset Appraisal?
An asset appraisal is a valuation method that determines the fair market value of a company’s tangible and intangible assets.
Types of Assets Appraised
- Tangible Assets: Real estate, equipment, inventory, and machinery.
- Intangible Assets: Patents, trademarks, brand recognition, and intellectual property.
Common Situations Requiring an Asset Appraisal
- Insurance Purposes: Determining the replacement cost of machinery, inventory, or facilities, to determine coverage amounts.
- Loan Collateral: Banks require asset appraisals to determine fair market value when assets are used as loan collateral.
- Depreciation Calculations: Establishing an accurate depreciation schedule for accounting and tax purposes.
- Liquidation Assessments: Determining asset values when a business is closing (a scenario Stratus Business Advisors helps LBM dealers avoid by considering a variety of transition options).
What is a Business Valuation?
A business valuation is a comprehensive analysis that determines the overall value of a company. Unlike an asset appraisal, it considers far more than just specific tangible and intangible assets. It accounts for operational strength, goodwill, customer relationships, industry position, and future earning potential. A business valuation typically assumes that the company is a going concern, meaning it is expected to continue operations indefinitely.
Methods Used in a Business Valuation
- Income Approach: Uses discounted cash flow (DCF) analysis to estimate future earnings and calculate their present value.
- Market Approach: Compares the business to similar companies recently sold in the same industry.
- Asset-Based Approach: Adjusts net assets to reflect their current fair market value rather than book value.
Common Situations Requiring a Business Valuation
- Succession and Estate Planning: Establishing accurate valuations for ownership transitions, minimizing tax implications, protecting family net worth and ensuring business continuity.
- Buying or Selling a Business: Determining fair market value for smooth transactions and negotiations.
- Buy-Sell or Shareholder Agreements: Setting values for buyout agreements, trigger events, and insurance coverage.
- Tax Planning: Managing tax liabilities related to gifting, estate reduction, or compliance with tax regulations.
Why This Matters for Independent LBM Dealers
By getting a business valuation, independent dealers can gain a holistic understanding of their company’s financial position, future earnings potential, and market competitiveness. This is particularly important when planning for succession, as it allows for a structured transition to family members, employees, or outside buyers. Without a
proper business valuation, owners may struggle to secure fair deals or may encounter financial, operational, or strategic challenges during an ownership transition.
Key Differences Between an Asset Appraisal and a Business Valuation
- Focus of Valuation: An asset appraisal examines individual assets, whereas a business valuation considers the overall enterprise, including goodwill and market positioning.
- Scope of Analysis: Business valuation accounts for cash flow, projected earnings, and market trends, while asset appraisal focuses on isolated physical or intangible items.
- Purpose of Method: Asset appraisals are used for liquidation, insurance, or collateral assessments, while business valuations guide ownership transitions, strategic planning, and financial forecasting.
- Level of Detail: A business valuation provides an analysis of financial health, whereas an asset appraisal is limited to specific assets.
- Going Concern vs. Liquidation: A business valuation assumes ongoing operations and considers earning potential, whereas an asset appraisal often evaluates liquidation scenarios.
The Role of Stratus Business Advisors
At Stratus Business Advisors, we specialize in providing independent business valuations for LBM dealers. Whether you are planning for the future, securing financing, or assessing your company’s value, our team offers expert, independent advice and support to meet your business’s needs.
