Plant and Equipment was last covered in Business Values Newsletter 111 in 2010. However, with the Australian Taxation Office’s various accelerated depreciation incentives allowed over the Covid-19 period, written down values of plant and equipment have probably never been so divergent from actual market value. So this article covers the practical approaches to assessing plant and equipment value, as part of assessing the overall market value of the small businesses.
Why is it Important to Correctly Assess Plant and Equipment Value?
Sales transactions of small businesses most commonly include the sale of the unencumbered operating assets of goodwill, stock/work in progress, plant and equipment. By way of example, if a manufacturing business has an EBITDA profit of $1m, and it is valued at a multiple of 3, this equates to a business value of $3m. If the plant and equipment value was just adopted at its written down value of say $250,000, stock value was $1m, then the remaining goodwill component is $1,750,000, calculated as follows:
In the above business value calculated at 3M, the goodwill component of $1,750,000 represents 1.75 x the EBITDA profit. But, what if rather than simply adopting the written down value of $250,000 for plant and equipment, it was correctly assessed at its market value of say $1m? On this basis, if the overall business value stayed the same, then the allocation between value components would change as follows:
To read the full article, please login to the members dashboard. If you’re not subscribed to the newsletter but would like to, then you can do so here.
