What does it mean to value the “workforce” of a company, and why is it necessary?

Determining the value of a company’s workforce is necessary for financial reporting purposes and is valued using the same approaches applied to any other asset.

For certain financial reporting requirements, the value of a company’s workforce needs to be determined. This is most commonly seen when a company is allocating the purchase price after completing a merger or acquisition. While the workforce is a component of goodwill and is not considered a separable intangible asset, a skilled, trained and assembled workforce is a key component in the value of other intangible assets, particularly when the employees have a specific, highly specialized skill set. The workforce of the company, therefore, needs to be valued in order to determine its contribution to the value of the other intangible assets acquired. Similar to other assets valued, three basic approaches are considered: the income, cost or market (sales comparison) approaches. Each approach is described in more detail below and how it is specifically applied to valuing the workforce, if appropriate.

Income Approach

When applying the income approach to an asset, the appraiser determines the present value of future economic benefits. This approach might work for those companies that are professional or service-oriented and where it is possible to measure the income that specific employees, or groups of employees, generate for the company. This approach may not be appropriate for manufacturing or other capital-intensive companies.

Cost Approach

The most common way to estimate the value of a workforce is to use the cost approach. This does not mean the cost of the salaries and benefits for those employees, but rather, the cost to recruit, hire and train the workforce if the efforts extended by the original company were to be duplicated. An appraiser should consider the characteristics of the current workforce that may affect the value of the workforce as a whole. Some questions to consider include:

• How many of the employees are highly compensated, long-term employees?
• Could the workforce be replaced with an equally skilled workforce that consists of younger, lower paid employees?
• Should the cost assume “reproduction” whereby the exact mix of characteristics of the current workforce would be duplicated? Or
• Can the cost assume “replacement” whereby the mix is tied more to the existing workforce’s output?

Market (Sales Comparison) Approach

This approach can be the most challenging to use in valuing a workforce since it requires the appraiser to review actual market transactions where the value of the workforce as part of the acquisition or merger was separately negotiated and identified. Negotiating the value of a company’s workforce prior to a transaction is rarely done, and so this data is hard to obtain. Therefore, the market approach is rarely used to value a company’s workforce.

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