Business Valuations – Stock vs Asset Sales
In order for the individual performing the business appraisal to identify the scope of work appropriately, the business appraisal must be requested by and prepared for the lender. The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business appraisal to know what is included in the sale (including any assumed debt). SOP 50 10 5 (I) (PG 161)
An asset sale is the purchase of an aggregation of individual assets. A stock sale is the purchase of the shares of a corporation. In an asset sale, the seller retains possession of the legal entity and the buyer purchases the individual assets of the company, such as equipment, fixtures, contracts, licenses, goodwill, and inventory. Please keep in mind that there are many variations in a purchase agreement, e.g. an asset sale might include accounts receivable or a stock sale might exclude long term debt.
It is important to make sure you are receiving an appropriate valuation depending on the terms of the acquisition.
The general differences between the asset and equity transaction structure are:
Asset Sale Value is the value of the company for an asset sale, including the business’s fixtures, furniture, equipment, inventory and goodwill, necessary to maintain uninterrupted operations. Here the seller usually retains cash, accounts receivable and other short-term assets, and is responsible for settling all liabilities and debt. An asset sale is not a stock ownership transaction.
Equity Value is the value of a company available to owners or shareholders. It incorporates all of the assets included in the “asset value” plus the firm’s liquid financial assets (cash, A/R, deposits, etc.) and minus it liabilities (short-term and long-term). Equity value is a determination of the value of stock ownership or member interest ownership at market value.
Market Value of Invested Capital or MVIC is equal to the total value of the firm or the value of the firm’s equity plus its long-term debt, e.g. it reflects the value of the entire capital structure (equity holders and debt holders). This value is usually appropriate for a refinance using an SBA loan.
Please reach out to Brandon Hall at email@example.com or 763-898-8653 if you have any further questions regarding business valuations for SBA purposes.
"Strive not to be a success, but rather to be of value" - Albert Einstein