Asset Approaches in business valuation compares the value of the assets less the value of the liabilities (debts) of the company and the difference is the company value. The formula is Assets – Liabilities = Value.
For small businesses this tends to be limited to the physical tangible assets. Intangible assets such as the value of the customer list, value of systems and processes, etc. tend to be lumped into goodwill and are not independently valued under the asset approach.
The assets and liabilities are often valued to different standards of value. An easy way to think of standard of value is it answers “who is establishing this value”. Another way to look at it is “who is the buyer and who is the seller.” Also, in the case of asset methods, standard of value may include time available to sell on the market.
Book Value is the value the asset are carried in the accounting records. This is the purchase price less depreciation. This may or may not reflect a market value. This is a value to the seller for accounting and/or tax purposes.
Market Value tends to value assets at the current value, near what might be considered dealer or distributor prices. Namely what the company would have to spend to acquire assets in similar condition or what they might sell a few assets for under normal operations.
Liquidation Value is the sale price for the assets under assumptions about the timing of the sale. Orderly liquidation means perhaps 90 days to sell (a bad situation but not dire). Forced liquidation means auction value.
Clearly each of these assumptions will change the value found dramatically.
Below is a simple example without estimating a value for intangible assets or goodwill:
Note the range of values found under the asset method depending on the standard of value applied. Choosing which value is most appropriate will depend on the underlying fact pattern of the subject company.
If you own a business, or prepare business valuations, or advise business owners based on business valuations (i.e. attorneys, CPA’s, financial planners, lenders, business brokers, etc.) you owe yourself and your clients the peace of mind of really understanding small business valuation.
“The Art of Business Valuation, Accurately Valuing a Small Business”, written by Greg Caruso will be published by Wiley in Fall 2020. The book is geared for valuating businesses with revenues under $10 million. This resource is easy to understand yet addresses the technical side of valuing small and very small businesses. In addition, the related website has sample reports, checklists and working Excel files of many calculations.