Business insolvency can be a worrying time for Directors who've given personal guarantees on company loans. What are the implications?
One of the ways to calculate business insolvency is to deduct the value of a business debt from sum of what the business’s assets could reasonably be expected to attain if realised. While a fairly accurate estimation of the value of assets can be achieved for most tangible assets, the ‘intangible assets’ a business might hold are a little less straightforward, as is putting a definite price on them.
What are intangible assets?
Most businesses, will be in possession of physical ‘things’. Whether that’s stock in trade, fixtures, fittings, vehicles, consumables, or anything that can be seen or held. These are tangible assets. Intangible assets on the other hand, as the name suggests are things which also have value, but while they cannot be seen, touched, held or weighed, are still undeniably there and in the possession of the business and it’s right and proper that they are included on a balance sheet.
A business that has traded successfully for several years, has built up its brand and established a reputation, is likely to have accrued trust and goodwill as a result. This trust may well allow it to be chosen over its less well known or less reputable competitors if all other things are equal. With this being the case, it’s clear that reputation, trust and goodwill can lead to in increase in turnover and profit and as such, undeniably have worth which needs to be accounted for. Deciding on a cash value for this worth, however, is substantially more tricky. Intellectual property and trademarks should also be considered as well as customer information and relationships.
Can Intangible Assets Save My Business From Insolvency?
An insolvent business should, as we know, stop trading, but if the line between solvency and insolvency is the test mentioned above and if you haven’t previously included the value of your business’s intangible assets to your balance sheet (or if it’s been a while since you considered their worth), then it’s possible your business might be worth a little more than your balance sheet shows and as such, your business might very well be saved by its reputation.
There are conventions for valuing intangible assets based on the market, their cost and their projected income value and you shouldn’t, for example, arbitrarily increase the value of your trademarks to offset the value of your liabilities, but a conversation with your accountant could well lead to your business’s book value being bolstered, returning it to solvency.
From there, contact us to arrange a free consultation and we can use our decades of experience to help your solvent business to move further away from the verge of insolvency and back to a more secure financial footing.