What is the real value of your company?

It is interesting that when someone wants to know the value of a company the first thing they do is go to the balance sheet.  This lists the assets (what you own), liabilities (what you owe) and the difference is the equity (your ownership part of the business).  Of the assets, what the creditors do not own the stockholders, partners or individuals own.  But is this the real story?  Let’s look first at some public companies-those that sell on some sort of exchange.  As an example we can take some very popular ones such as Apple, Microsoft and Proctor & Gamble.  Their balance sheets list all their assets such as cash, marketable securities, inventory, accounts receivable, property, plant and equipment, patents, copyrights, licenses, etc.  Nowhere on the balance sheet is the real value of the company.  And where is this real value?  I believe it is in the intangible, intellectual property, the vision and the insight of the people that run the organization.

Organizations do have value that is intrinsic but the real value is in the human assets that make the company what it is.  Look at Apple with Steve Jobs and Microsoft with Bill Gates and all the other companies that have been able to maintain their company’s sustainable competitive advantage.  Look at the cashier or the office staff of your small company.  This, in many cases, is the first line of contact with the customer.  They are the ones that interact directly with the market place.  They are the ones that make the first impression and are the representatives that act as ambassadors for your company.  It is important that small business owners understand this.

Unfortunately, the owners of small businesses seem to forget about the training and education necessary to have their employees understand their culture and their mission.  What value do businesses put on their employees?  What value should be placed on the vision and market competitiveness that individuals possess?   It is commonly said that if it wasn’t for so and so, this business would not be what it is.  So how do we quantify the value of human resources?  Well we know that without humans (employees) most businesses couldn’t operate.  Even if the business is an on-line or internet business it still takes people to program, operate, manage and determine its directions of markets, products and services.  It still takes people with a vision.

I leave you with the question, how do we value the company and what is the real worth of the business?  The balance sheet does not tell the complete story.  When thinking about buying a business via a merger or acquisition, one needs to understand more than the numbers.  I believe the numbers are a result of human action.  Numbers reflect the activity of people so it is important that one investigate the source of the numbers on the balance sheet.  Are they a result of good management? Are they the result of a better understanding of the market place and the competition?  Are they a reflection of the vision of the future needs of the consumer?  Or are they a combination of all the above issues? In any case, the question you have to ask yourself is can I duplicate this human skill and do I have the skill sets to make the numbers better?  Never underestimate the value of employees; they make your company what it is.

Yes, the balance sheet is important but not the whole story.  Yes, the bank and the IRS and your creditors use the balance sheet to make major decisions that affect your company but only people can make a difference.
Neil Shnider, MBA, CPA, is a special projects consultant for the Small Business Development Center at Florida Gulf Coast University.  Go to www.theshnidergroup.com for more small business information and tools.