By established convention, companies are usually valued on the business enterprise value basis. For publicly traded companies, this is the sum of the shareholders’ equity, less cash or cash equivalents, and the total value of debt. This represents the current value of the company regardless of the capital structure, i.e. what types of debt or equity capital the firm uses.
Private companies often sell in an asset sale transaction. This generally includes the value of its long-term assets, also known as furniture, fixtures and equipment (FF&E for short) as well as the intangibles such as business goodwill. Typically, the accounts receivable are retained by the seller, along with the company’s cash assets. Inventory is often valued separately and can be added to the asset sale value. Again, the value of debt is added back to the equity value of the company. That’s because in an asset sale, the buyer expects the company assets to be delivered free and clear.
On occasion, a company can be sold on a stock basis. In this case, the buyer assumes the firm’s liabilities. The equity value of the business in this case excludes the liabilities but includes all short-term and long-term assets.
Given this diversity of business values, you should consider advising the readers of your business appraisal report what type of business value you have determined. It could make a major difference if the the person reading your report mistakenly assumes that your analysis concludes the business enterprise value when in fact you have calculated the equity value. If the firm uses debt capital for financing operations, this is likely to understate the actual value and result in misunderstanding down the road.
Even if you use the recognized terms for reporting business value, be sure to spell out what is actually included in your results. Indeed, the specific description of what is included in your business valuation calculations is required by all major business appraisal standards.