Real-Life Math
Determining the worth of a company is no easy task. There are concrete numbers to work with, like cash assets, debt ratio, sales volume and so on. But there are also numbers that are harder to nail down, and that's where your focus is today.
You've determined that the business has $5.7 million in hard assets, but the intellectual capital that is selling with the business is harder to quantify. For example, how much are 3 software developers and their ideas worth? Fortunately, you've created a formula that helps.
You take the total profits those developers' projects have brought into the company, divide it by the number of years they have been with the company and then multiply that by 15, an estimated number of years the company will exist. That gives you a monetary value for the skills the software developers will provide for the sales of the company.
In this case, one of the software developers is relatively new with the company. He has been helpful, but has created nothing new that broke ground for the company.
The second software developer has been with the company for close to 3 years. During that time, he's developed 2 successful products that changed the direction of the company. One of those projects has a total profit of $150,000 so far, and the other netted nearly $300,000 before it was replaced.
The third software developer has been with the company since it started 8 years ago. He's developed 5 software programs, and 4 of the 5 brought $500,000 in profits to the company. The fifth one just hit the $400,000 mark.
How much would you estimate the software developers to be worth as a company asset?