You probably heard it often from companies: “Our people are our most valuable asset”. This may sound boring but the value of trained and assembled workforce is quite real. In fact, it is the employees that define the company and make it special.
So what makes up the value of a workforce? In fact, it comprises two parts: the cost to recruit, bring on board, train and allocate the staffers to their jobs. In addition, the employees have value in terms of developing products and services and delivering them to customers.
As a rule, business appraisers focus on the cost of replacing employees rather than the income stream produced by the firm.
The question the appraiser asks is what it costs to create a team of people who understand the business and can build products that customers want to buy. And employees don’t just appear by magic. Each new addition must be found and hired over time to meet the company’s growing needs.
So you can look back to estimate the historic costs per employee. These costs may shed light on what it would cost today to replace the staff. This then would reflect the value of the trained and assembled workforce.
Obviously, the costs vary depending on the staff in question. Finding the right people for the job is half the battle. Then the company must bear the costs of moving the new hires, training them and allowing for a learning curve before they become fully productive. These costs are real as the existing employees do not incur them.
Based on experience of bringing people on board, the company would have a good idea about such costs. For example, they may be represented as a percentage of salary. As a rule, the more skilled the worker, the higher the costs. So if a long-term employee departs, a new hire will take a longer time to reach peak performance if the job’s skill level is high.
Another question an appraiser must address: what length of time should they use to amortize the actual amount? Some valuation experts feel that the tenure of the long-term company staff is the right measure of time.
But this could understate the actual turnover in the firm. As a result, many appraisers pick a much shorter life. Often, this is based on the historic departure rates. For example, if in recent years the company experienced 20% turnover per year, then you could assume that a 5 year life for the value of trained and assembled workforce is a good choice.