A thorough valuation of a business’s financial assets involves a detailed review of its current income statements, cash flow analysis, and assessment of the assets held inside the business.
Evaluating a Company’s Worth
There are different stakeholders interested in evaluating a company’s net worth. Inside the business, these stakeholders include the CEO, board of directors, shareholders, and financial partners including banks or investment partners. Outsiders looking to evaluate a company may include new or potential investors, or those interested in purchasing the business outright.
The Four Questions
To evaluate a company’s financial assets four questions to ask pertain to a business’s assets, resources, capabilities, and competitive advantages it may have in the marketplace.
How valuable are the resources inside the business? Do these resources help build and sustain a competitive advantage for the business in the marketplace?
Does the business have a unique asset base that sets it apart from its competitors? Or do its competitors have similar assets? If competitors have similar capabilities or can obtain similar resources with relative ease, the strategic value of the assets presented to determine the value of the business is diminished.
Are the strategic resources or assets easy to copy? Most strategic resources, with a few exceptions including patents or trademarks, can be duplicated. But, if it’s expensive for a rival business to duplicate a strategic resource or asset, the higher the valuation can be placed upon a business’s overall worth.
Is the business well-positioned to exploit the resource or business opportunities? Possessing a strategic resource or asset doesn’t necessarily put a higher valuation on a business unless the business is able to monetize these opportunities into sales and cash flow.