Can a company with no assets have any value?
We are often asked whether a company with minimal net assets (or even net liabilities) in the accounts can have any value. This can be relevant in family law cases in determining whether appointing a Single Joint Expert to value the company is cost proportionate.
The short answer is yes, a company with no assets or even net liabilities can have value. In most cases the net assets in the published accounts will give an indication of the “bottom line valuation” of the company but the market value of the business can be significantly higher.
It may also be the case that the company owners have chosen to distribute all or most the profits each year and thus the net assets (retained reserves) are minimal but the company may be generating significant earnings and thus will have a value far higher than its net assets.
In deciding if the company has value over and above its net assets we need to assess its ability to generate a positive cash flow in the future. There are a number of methods to value a profitable company. Typically, the valuer will look at the historical profits in order to estimate a figure for the future maintainable earnings (“FME”) of the company and apply a multiple to the FME to assess what we describe as “Enterprise Value”. If financial projections are available these will also be considered.
Unfortunately, smaller companies are not currently required to file their profit and loss account in the published accounts and therefore it is necessary to obtain a copy of the accounts prepared for the shareholders or other information to assess if the business is generating a commercial return.
A simplistic example - Holly and Ivy Limited
Net assets as at 31 December 2024 £10,000
Valuation based on net assets £10,000
However, from our enquiries we identify that the business is generating profits each year which are distributed in full to the owners each year and hence net assets are minimal.
Estimated future maintainable earnings £50,000
Applying a multiple of, say, 4X – Enterprise Value £200,000
In this instance the value of goodwill is approximately £190,000 (£200,000 less £10,000).
Conclusion
If the net assets on the balance sheet are minimal or even negative, this may suggest the company has negligible value. However, in order to reach an informed conclusion we need some information on the recent trading performance.
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