Creditworthiness Vs. Business Value

“Are the 4 C’s the way a lender would value a business? Or is there another way?”

That’s not the way a lender would value the business, it’s the way they’re going to assess the business from a credit point of view. The valuation of the business will come in a number of forms and also based on the number of industries. Some of those industries will have a value as such.

It’s not a value in terms of what you’re going to sell the business for but it’s a value in terms of how the bank assesses it to lend against. 

It may be a multiple of the income or assets that are in that business, and it may be the actual value of that business as a going concern. If in a rent roll business, banks will actually obtain a professional valuation on a rent roll business. A business that a real estate agent manages 200 rental properties, they receive a percentage of the rent to manage those properties and then a valuer will apply a multiple of that rental income to derive a value. That multiple may be anywhere from two times to five times depending on the location of those properties and a number of other factors. 

The bank will get a professional valuation from an external party to understand the value of that business. Whereas, potentially with an accounting business or an insurance business, it’s a multiple of income that gives the bank an internal value, but it is not necessarily what that business may actually sell for in an open market. 

It gives the banker an internal valuation that they can use and then take that to a manufacturing business. It might have machinery equipment, laser cutting equipment, racking, forklifts, all sorts of different things. The bank may actually engage external valuation firms to provide specific values to those assets. The 4 Cs won’t give a value, but it will be a framework to the bank understanding and assessing creditworthiness of that business.

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