By analyzing the cost avoided by having a trained workforce.
By: AccuVal Associates, Inc.
Whether you're buying or selling a business, one of the most important assets to consider is the assembled and trained workforce. A company's workforce is an intangible asset, and one that's critical for continued earnings that justify the selling or purchase price of an entity.
The workforce constitutes an essential asset of the business: its institutional knowledge. Whether it's the purchasing department with in-depth knowledge of the supply chain, the production staff that understands the manufacturing process, the sales staff with detailed knowledge of the product line and its competition, the workforce is essential to the success of any business.
Computing workforce value is relatively straightforward, and the process relies on a variant of the cost approach called the cost-avoided technique. Costs avoided are separated into two groups: avoided recruiting or training costs, and the cost of the productivity loss avoided by having a trained workforce. The valuation analysis quantifies both cost categories and assumes that the company is operating as a "typical market participant," which means employee wages stand at market-driven rates. Any figures required for the analysis are typically provided by management.
The costs for recruitment and training provide half the workforce-value estimate. Employees are first classified using meaningful categories, typically by job descriptions and the method(s) used to fill each positions, along with the number of employees in each job function.
Recruitment costs stem from employment agencies, advertising and other expenses. For example, an employment agency might be used in the hiring process, which typically results in a fee based on the starting salary of a position. Management estimates the percentage of time they use employment agencies to hire employees in each classification. Additional hiring costs can include expenses for interviewing prospective candidates, relocating them and conducting drug tests or background checks.
Next, the cost of training employees to bring them to the level of performance expected is added to these costs. Training costs reflect the amount of time spent by the new employee during the typical training period for each job classification. Usually, this cost is based on a management department's historical experience in filling various positions.
The second half of the figure is the cost of lost productivity during training. While training, employees are not at full productivity, and a company essentially absorbs the hidden cost of inefficiency.
This cost is estimated by multiplying the fully burdened monthly salary of the employee by the average amount of inefficiency (deficiency) incurred over the training period (burdened salary multiplied by deficiency level, multiplied by training period). The average amount of inefficiency is estimated by management for all employee classifications. Management provides an estimate of the training period it takes an employee in each classification to reach full productivity. The analysis also includes a timing adjustment to account for the fact that an employee becomes more efficient gradually, not dramatically overnight.
The total value of the workforce is the sum of the recruitment and training costs and the cost of the avoided productivity loss. This value represents one of the key components of the business enterprise at large.
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.