What are creative ways to value FF&E when underwriting a company?

searcher profile

July 15, 2021

by a searcher from University of Illinois at Urbana-Champaign in Dallas, TX, USA

In a service business, do you just add the appraised value of the equipment (i.e. vehicles, specialty equipment) to the valuation of the cash flow? Have heard multiple approaches, considering that the equipment is needed to generate the cash flow.

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commentor profile
Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA
Hi Scott, I'm a business appraiser and business broker. For a going concern business, it is not proper to add the tangible asset value to a cash flow value. That is combining two valuation approaches. If the business is worth "more dead than alive" meaning that the tangible assets have a greater value than the calculated market approach or income approach to value, only then would you use the asset value to determine an asking price. However, it is likely you wouldn't be interested in buying that business. Typically, the tangible assets are only as good as the income they generate. In a service business, the biggest asset (if the company generates positive cash flow) will be the goodwill asset. Sales price less tangible asset value equals goodwill. Or said another way, the asset value is NOT added to the earnings value of the company. Those assets create company cash flow for a going-concern business. Hope that helps. Let me know.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
Sheila Spangler answer is right on the spot. Do not double-dip, nor take weighted values from different valuation methods. Value of a business should include any and all assets required to generate the profit/cash flow
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