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Market Value of Invested Capital

Definition

A business value measure equal to the market values of owners' equity plus long-term interest bearing debt.

What It Means

Widely used to measure the value of small businesses, Market Value of Invested Capital, abbreviated MVIC, represents the value of the total capital invested in the company. This covers the business tangible assets and goodwill both of which may be financed by the business owners or their creditors.

In a business sale, Market Value of Invested Capital generally excludes the value of business owned real estate, consulting agreement values, and a contingent portion of the business purchase price such as an earnout.

It includes the value of the non-compete agreements with the outgoing business management and may also include the value of the business current assets, if transferred to the buyer.

There are several reasons why MVIC is the preferred way to assess the value of a private business:

1. Most small business sales are structured as asset transactions

In such a sale, the business assets are delivered free and clear to the buyer. The buyer may also assume some of the business liabilities. Market Value of Invested Capital is what the buyer pays for the business.

2. Small business owners usually have a controlling ownership interest in the busines

One key control prerogative is that you, as the business owner, can change the company's capital structure, shifting the balance between the equity and debt capital.

MVIC versus equity price

In contrast, public company sales are always structured as stock sales. Most investors in public companies buy a small percentage of the outstanding stock.

Such minority investors benefit from the stock capital appreciation and dividends. Both of these are equity based since the company must service its debt before it distributes dividends to the shareholders.

In addition, most public company investors lack the controlling share of the company and cannot affect the way the corporate management determines the company's capital structure.

Public company valuation multiples - pitfalls to avoid

Beware of using the valuation multiples derived from public company stock sales to estimate the value of a small business. Such valuation multiples can be very misleading and give you inaccurate results - without careful adjustments that address the key differences between publicly traded firms and privately owned small companies:

  • Small business ownership interests are less marketable than public company stock.
  • Public stock valuation multiples are based on the value of equity, not total invested capital.
  • Privately owned businesses are generally valued on the controlling ownership interest basis.
  • Small business valuation multiples must incorporate the additional risks inherent in small company investments. This is known as the company size risk premium.
  • Small business financial statements require recasting to determine the available cash flow - the basis of small business appraisal.

Tools for Small Business Valuation