The asset approach to business valuation
The asset approach to business valuation provides for the sum of the parts of a business.
Those assets may include tangible and intangible assets. It is sometimes referred to as the "cost approach".
Case study in asset-based business valuation
A plumbing distributor had grown his business over decades within the building industry. He showed me a warehouse packed to the rafters with all manner of plumbing goods. So many fittings; from taps and mixers, to fountains and showers, to baths and toilets and geysers.
“Five million Rands, at cost,” he told me. “I bought a lot of it in bulk. He pointed to a section of about a quarter of the warehouse, “I bought it at the auction when (a competitor) went under. That was a really good deal.”
There was a thick layer of dust on some of the items. And I remembered the liquidation of that other business.
“The inventory we sell most is in this corner. The rest of the goods move slower.”
“But why do you buy this if you know that it will move only over a very long time?”
“It all adds to the value of the company.”
His helpful accountant supported the notion. His bankers supported the notion with an overdraft facility.
But the inventory was not moving, and the company struggled to pay its overhead.
If he spoke the same good fight to his bankers and accountant, I could see why they agreed with him.
The asset-based approach to business valuation is a key method in non-operating companies.
Use an asset valuation for
The asset based approach in operating companies
Use the asset approach for operational companies to compare the other results.
The asset-based approach is not additional to one of the other methods. It is to complement the results of another.
It is a mistake to add the income based result to the asset value. It is only a supporting result.
A result using the income approach to business valuation is of the complete business. It includes those assets required to generate its income.
Net asset value
Net asset value approach to business valuation is often referred to as “book value”.
You don’t need a business valuation to see what this is. Look in your financial statements, at the balance sheet. it is under “equity” or “capital and reserves”, and may be the sum of various items:
In theory if the company were to
Case study in asset-based approach to business valuation
In 2002 I was mandated to sell a business for its net asset value. I was on a commission agreement, and wanted to make more money. It took five months, but we sold it for 2,5 X its net asset value. I believe that the price achieved in that instance was a bit more than the business value. It was a great deal more than the net asset value.
Adjusted book value
Tangible book value
The net asset value, less intangibles. Intangibles would include: