Asset-based business valuations

The asset accumulation method and the adjusted net asset method are both generally accepted business valuation methods of the asset-based business valuation approach.

When properly applied using consistent valuation variables, all asset-based business valuation approach methods should conclude approximately the same value for the subject business enterprise.

Additionally, when properly applied using consistent valuation variables, all asset-based business valuation approach methods may be used to conclude any of the following ownership interests:

  1. Total business enterprise (i.e., total long-term debt and total owners’ equity)
  2. Total business assets (i.e., total subject entity tangible and intangible assets)
  3. Total business owners’ equity (e.g., all classes of equity)
  4. A single class of owners’ equity (e.g., total common stock)
  5. A specific block of owners’ equity (e.g., class B nonvoting stock)

Like the other asset-based approach methods, the adjusted net asset vale method typically concludes a marketable, controlling ownership interest level of value. If the valuation subject is a different level of value (say a non marketable, noncontrolling ownership interest in the company common stock), then the valuation expert may need to identify and quantify appropriate valuation adjustments.

Such adjustments could include a discount for lack of marketability, a discount for lack of control, or a discount for contractual transferability (or other) restrictions.

For several reasons, the adjusted net asset vale method is not the same analysis as the net book value method.

First, the net book value method is not a generally accepted business valuation method at all. The net book value “method” is a financial accounting calculation.

In the so-called net book value method, the valuation expert relies entirely on data from the company’s financial statements, without the application of valuation analyses or valuation expert professional judgment. The valuation expert subtracts the company’s recorded amount of liabilities (both current and non-current) from the company’s recorded amount of assets (both current and non-current). This calculation provides what is often called the net book value of the subject company.

This net book value calculation describes the mathematical relationships between the assets and the liabilities recorded on the company’s balance sheet. For a balance sheet prepared in accordance with GAAP, these accounts should typically be recorded on a historical cost basis. That historical cost basis is typically not indicative of a current value estimation for the company owners’ equity.

Second, in contrast, the adjusted net asset vale method may start with the net book value of the company assets and liabilities. Then, the valuation expert applies professional judgment and employs a series of valuation procedures. The result of these valuation procedures is a current value estimation of the company owners’ equity.

In short:

Asset Accumulation method

The asset accumulation method is primarily used to value companies with a significant number of assets and earnings that don’t support a value greater than the value of tangible assets. Examples of such companies may include real estate holding or oil and gas companies.

This method uses the sum of the listed tangible assets and liabilities listed on the balance sheet with the goal of arriving at a total value based on the value of individual assets.

A step up or discount must be applied to account for the cost to obtain similar assets in current market conditions. Finally, the intangible assets (e.g., strategic partnerships and intellectual property) and liabilities (e.g., pending litigation or tax obligations) of a company are considered and a final value assigned.

Adjusted net asset method

The adjusted net asset method is a combination of the market and income approach. It involves directly measuring the fair value of the recognised and unrecognised assets and liabilities of the investee. This method is likely to be appropriate for entities that derive value from holding assets (such as property holding companies or investment entities) and may also be appropriate for entities in their early stages that have little financial history and may not yet have developed products.

Typically, the adjusted net asset method involves making adjustments to the balance sheet carrying amounts of assets and liabilities. Items that are commonly subject to adjustments include:

  • Intangible assets
  • Property plant and equipment
  • Receivables
  • Inter-company balances
  • Financial assets not measured at fair value
  • Unrecognised contingent liabilities.

Once an equity valuation has been derived, the investor would also need to consider making the following adjustments for its share of the investee’s equity instruments held:

  • Non controlling interest
  • Lack of liquidity
  • The passage of time that could have an effect on the changes in fair value of the assets and liabilities or any additions/ disposals
  • Any other contractual agreements specific to the equity instruments held etc.

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