Real-Life Math -- Solution
Estimating the value of an intangible asset is very difficult to do. And often, even after you've calculated the worth of something like a software developer's knowledge, an accounting firm will come along later and change it. However, it's necessary to get a preliminary figure to work with.
In this case, you're selling a company that has 3 software developers. One of them is qualified as merely another employee. The other 2 are slightly more difficult.
If your second software developer has done 2 projects that brought $150,000 and $300,000 in profits to the company, you would first add those figures.
$150,000 + $300,00 = $450,000
Now, you need to divide that by the number of years the developer has been with the company.
$450,000 / 3 = $150,000
Finally, to determine his approximate value over the lifetime of the company, you multiply the average profit per year by the number of years the company will likely stay in business. This company has a life expectancy of about 15 years.
$150,000 x 15 = $2.25 million
The third software developer is valued in the same way. First, add his project value.
($500,000 x 4) + $400,000 = $2,400,000
Then divide that by the number of years he's been with the company.
$2,400,000 / 8 = $300,000
And finally, multiply the average profit per year by the number of years the company is expected to be in business.
$300,000 x 15 = $4.5 million
To determine the value of both software developers, add their individual values.
$2.25 million + $4.5 million = $6.75 million
The 2 software developers would be worth $6.75 million in the sale of the company.
"When you sell a company," says Guy Belanger, a mergers and acquisitions financial specialist, "you look at their financials. But there is a danger of being too financial because there are other aspects of the business. Basic mathematics will usually tell you all you need to know. The rest should be left to a certified accountant."