The asset accumulation method and the adjusted net asset method are both generally accepted business valuation methods of the asset-based business valuation approach. This is an example resulting in the recognition of negative goodwill. Other examples are intangible assets and tangible asset.
The valuation expert is again retained to estimate the value of 100 percent of the owners’ equity of a company as of December 31, 2016. In this example, the company is called Blue Client Company (“Blue”).
Again, the assignment calls for a fair market value standard of value and a marketable, controlling ownership interest level of value.
The Blue December 31, 2016, historical cost basis balance sheet is again the same as the Red December 31, 2016, historical cost basis balance sheet. All financial data are presented in $000s.
The valuation expert again decides to apply the asset-based business valuation approach and the adjusted net asset value valuation method to conclude the Blue total equity value.
The valuation expert performs the same due diligence analysis of the company and concludes the same valuation variables used in the prior two examples with regard to WACC, expected long-term growth rate in excess earnings, and direct capitalization rate.
As with the White analysis, the valuation expert has the opportunity to discretely appraise certain of the Blue asset categories. Using the same market approach analysis, the valuation expert values the inventory at $6,000. And, the company management provides the valuation expert with current fair market value appraisals of the property, plant, and equipment.
The Blue land is valued at $12,000 using the market approach, and the Blue building is valued at $14,000 using the cost approach.
The only difference between the Blue fact set and the White fact set is that, this time, management provides the valuation expert with a $30,000 appraisal for the Blue equipment. That $30,000 fair market value conclusion is based on a cost approach and an RCNLD method analysis.
The valuation expert used the inventory and the tangible asset valuations in the adjusted net asset value method analysis. The valuation expert did not have access to any intangible asset valuations with regard to Blue.
Based on the Blue historical cost balance sheet and the current valuations for the Blue inventory and tangible assets, the valuation expert performed the capitalized excess earnings method analysis summarized in Exhibit 6:Read More »Adjusted net asset method negative goodwill example