American Translators Association (ATA): Business Smarts-What is a Freelance Translation Business Worth

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American Translators Association (ATA): Business Smarts-What is a Freelance Translation Business Worth

What is a Freelance Translation Business Worth

There are many formulas for calculating the net worth of a larger business for tax purposes or to arrive at a fair sale value. For instance, the EBITDA method looks at Earnings Before Interest, Taxes, Depreciation, or Amortization, while other accounting procedures arrive at valuations by considering cash flow, personnel cost, and debt. But what about typical freelance enterprises, which, in most cases, are small companies run by a single person? This column looks at the specific question of finding the value of freelance businesses.

Dear Business Smarts:

I am in the process of applying for student aid for my college-bound son and have to fill out financial aid forms. In this context, I am wondering how I would calculate the value of my business. I am the sole proprietor of my freelance translation business. I do not outsource any assignments,which means that all the money that comes into the company is earned from my translation services. Thank you for your advice.

Dear Valued:

In contrast to larger translation businesses, which have trained employees, client lists, a reputable name in the industry, and other quantifiable assets that could be included in a potential sale, your small company is built entirely on your own work and skills. No one could purchase the business from you and expect to continue running it without changes. For further clarification on this matter, we consulted Ted Wozniak, a financial translator and business expert. His reply:

"The value of a professional service business is almost entirely dependent on the value that the individual service provider brings to that business. A reasonable argument can be made that the individual translator IS the primary business asset and, as such, cannot be sold along with other assets. Accordingly, an earnings approach to valuation is meaningless unless the same individual remains with the business. In other words, the translator brings value to her business, and without her, the business has no value beyond the relatively minor value that is contained in the few physical assets she owns."

For the purpose of indicating the value of your business on financial aid forms, which will also ask about your household income elsewhere, it may be sufficient simply to look at your equity, which is the value of your assets minus any liabilities (debt) you owe. With the exception of software, which, according to tax definitions, depreciates or loses its value over the course of three years, most other purchases you made for your business will depreciate over five years. This means that you would not include the full purchase price of your computer, your software, or your dictionaries in the current value of your business. Instead, you may deduct a certain percentage of their value for every year you have owned them.

Once you have made this calculation, add up the depreciated values of your office equipment, furniture, and other items that are used exclusively for the business: this is the value of your business. For most sole proprietorships, this number is unlikely to exceed four digits.

Although there has been more and more discussion recently in the translation community about the value of translation memories— which can contain substantial volumes of translated material—no one has yet arrived at a standardized solution. So, while translation memories constitute your "intellectual property," it is not yet necessary to incorporate them into the equation.

Reprinted from The ATA Chronicle: January 2008, p 43