In business, when you need to ascertain exactly what your company is worth, working out the best method can be difficult. 

In this blog we discuss the intricacies that come with an asset based business valuation — a method that can be vital for a great many different types of companies. 

We will explore the fundamental principles of the method, as the key steps involved in coming to a conclusion, as well as shedding some light on its applicability for your company, its advantages and limitations, and more. 

Regardless of if you’re a business owner, this blog will provide you with a comprehensive and all-encompassing understanding of exactly how asset based business validation works.

What is an Asset Based Valuation?

An asset based valuation is one of a number of different approaches for calculating the value of a business. This method bases itself on the value of the company’s assets. It utilises fair market values of both assets and liabilities to come up with a figure which can be used to form a valuation hypothesis for the business.

While an asset based business valuation can be highly useful for some businesses, for others it can have limitations. This is most obviously true when companies rely heavily on ‘intangible assets’ or are in a position where they are expected to grow significantly in the future. 

In these cases, you may wish to consider alternative valuation methods — as they could provide your business with a more accurate estimate of its valuation, taking into account these other factors. 

How Does an Asset Based Business Valuation Work? 

Asset based business valuations work by identifying and assessing a firm’s catalogue of assets and liabilities, determining their current fair market value, evaluating if there are any intangible assets that must be factored in, and deducting the value of the liabilities from that of the assets. 

Here’s a guide to exactly how asset based business valuation works: 

Identify Assets

The first step in asset based valuations requires you to identify and categorise your assets into tangible and intangible assets:

  • Tangible Assets: Tangible assets are the physical assets a company will own that have measurable values. Examples include property, equipment, inventory, etc. These are valued based on how much they would attract on the open market. 
  • Intangible Assets: More difficult to value. Intangible assets are non-physical assets that retain value. This can include intellectual property, patents, trademarks, copyrights, customer goodwill, and more. 

Determine Asset Value

While we’ve discussed the valuation of tangible and intangible assets, it’s worth emphasising the importance of current assets, particularly when assessing the recoverability of debtors and the value of stock.

For tangible assets, you will typically determine the fair market value by considering how similar assets have sold in the market recently, if there are any widely accepted industry standards for the asset, or you can consider having the asset appraised by an expert (at an additional cost). 

Intangible assets are altogether more complex to value. Multiple methods, such as the income approach which evaluates an asset’s worth based on its expected future income, and the market approach which involves comparing your firm’s intangible assets to similar assets that have been sold or valued in the market recently, can be utilised. 

When performing an asset based valuation, remember to consider all angles, including current assets like the recoverability of debtors and the value of company stock. These components are critical for a comprehensive understanding of your business’s financial position and overall value. Assessing the recoverability of debtors ensures that you consider the likelihood of receiving outstanding payments which may impact your asset valuation. Additionally, determining the value of stock is essential, as it directly impacts your company’s liquidity and financial health. 

Ultimately, by incorporating the evaluation of current assets, alongside your tangible and intangible assets, you gain a much more complete understanding of your business’s financial position and overall value. This more holistic approach ensures that critical factors cannot be overlooked, influencing your valuation results. 

Assess Company Liabilities

Once you have valued your businesses associated assets, the next step is to assess its liabilities. This includes debts, loans, future obligations, and more. It’s vital that you identify and accurately assess every ongoing liability if you want a correct and precise valuation. 

Calculate the Value

Asset based business valuation is relatively simple to calculate. All you need to do once you have the total value of your tangible and intangible assets, and have collated all your liabilities, is to deduct the liabilities from the assets. This figure is referred to as your Net Asset Value (NAV) 

Why Should I Consider a Valuation Based on Assets?

An asset based business valuation is notably worth considering for companies that hold large portions of their value in their tangible assets. If your business is primarily based around these physical assets, then a valuation based on assets can provide an excellent and reliable estimate of its worth. 

Other examples of why a valuation based on assets is worth considering include: 

During the Liquidation Process

Asset based business valuation is commonly utilised when a company is facing serious financial difficulties or being sold as part of the bankruptcy process.

In instances such as this, the spotlight on business assets increases significantly. This is because they will often be the primary method of recovery for the stakeholders. Therefore, in this circumstance, a valuation based on assets can be one of the most useful methods. 

When Valuing Long-Term Assets

Unlike some other methods of valuation, asset based valuation relies almost exclusively on the current and historical cost associated with assets. This can be excellent if the company has held its assets for a significant amount of time that have appreciated over multiple years. 

For Risk Assessment Purposes

A valuation based on assets can be highly valuable if risk assessment is important. This is key if prospective investors or lenders are seeking to understand the assets they should be looking to if they need collateral for their investment. 

They can also utilise this to get some understanding of the security their investment/loan will have. 

Complement Other Valuation Methods

While asset based business valuation may not be the best method for all companies, it can still be worth considering. In fact, valuation based on assets can complement other valuation methods and ensure that your valuation is as all-encompassing and accurate as possible. 

By considering your firm’s asset value in addition to, for example, your future earnings or comparisons with the market, you can gain a much more comprehensive understanding of the overall value of your firm.

Expert Advice Can Help Clarify Your Situation 

Ultimately, asset based valuation is most commonly associated with companies in certain industries, such as real estate or manufacturing, where the value of the business can be explicitly tied to its tangible assets. 

However, for firms with a heavier focus on intangible assets, or with strong potential for future earnings growth, other valuation methods, or a combination of multiple methods could prove most fruitful. 

It’s important to get to grips with the intricacies and complexities of asset based business valuation because if you’re not careful and rush head-first into this method, you could find your business significantly undervalued if it doesn’t fit into set parameters. 

On the whole though, asset based valuation should be seen as a foundation that can be used for forensic accountants and valuation experts alike looking for the true value of a business.

The Inquesta team of forensic accountants have been operating in the field for years. We have seen it all when it comes to owners and directors seeking to ascertain the worth of their business. Our keen understanding of how assets can shape the value of a company, particularly when used alongside other methods, we are able to provide as accurate a valuation as possible — valuations that should stand up to any scrutiny down the line.

Our expert teams are here to help. Our service is designed to be bespoke to everybody. There should never be a one-size-fits all solution to anything. Unsuitable valuation methods could see your business undervalued and leave significant sums of money ‘on the table’. Our knowledge and experience ensures that this possibility does not need to be a concern. 

If you are looking for expert assistance in asset based business valuation and wish to enquire further, our team is here to help. Contact us today to learn more about the true value of your business and gain more clarity on your current financial position.  

Additionally, for more information about two of the most common circumstances where business valuation is essential, check out our two dedicated guides: Business Valuation for Shareholders Disputes and Business Valuation for Divorce and Matrimonial Disputes.