How To Value A Business: Asset Approach

Asset Approach—The Asset Approach adjusts a company’s assets and liabilities to their fair market values and adds to the Balance Sheet the value of intangible assets and any contingent liabilities. While tangible assets can be appraised and reported on an adjusted Balance Sheet accordingly, the valuation of intangible assets such as reputation, employee talent, etc. is more complicated.

One method of deriving an indication of value under the Asset Approach is the excess earnings method. The excess earnings method is a hybrid of the Asset and Income Approaches. The excess earnings method requires the valuation of both tangible and intangible assets then deducting the company’s liabilities in order to determine the fair market value of a company.

The adjusted book value method adjusts the company’s assets and liabilities to market values to develop an indication of value. This method presumes the underlying assets are the driving factor in the valuation of the company and that the fair market value is approximated by the adjusted book value. However, this method does not consider the future earnings potential of the business. Usually, this method is used primarily to value holding companies, companies that have no goodwill value, or companies whose value is primarily intrinsic to its tangible assets.

The business valuation professional may determine that the Asset Approach is inappropriate for determining an indication of value for a number of reasons. For example, the excess earnings method is often not employed as the rates of return are arbitrary.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s