Business Valuation - What is the "Asset Approach"?
The asset approach is a business valuation method that sums up the value of the assets and subtracts any liabilities to reach an adjusted book value. This approach is rarely applied in valuations of going-concern operating companies due to the ability to use the income or market valuation approaches. However, the asset-based approach may be appropriate in certain circumstances and can also be used as a complementary or confirmatory analysis in conjunction with the income and market valuation approaches.
Asset Approach Summary
The asset approach involves determining the value of a company’s assets and liabilities and making certain adjustments to arrive at an adjusted book value. Examples of some frequently made adjustments include, writing off uncollectible accounts receivable, writing off unused or obsolete inventory, and identifying any non-operating assets or liabilities. Additional factors to consider include whether or not the company holds significant real or personal property. A separate appraisal of the real or personal property by a qualified appraiser may be needed.
Given the focus on the assets and liabilities of a business, the asset approach is best used for companies that are asset intensive or lack a history of earnings. However, it can also be applicable to the valuation of an operating company.
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Disclaimer: The information contained in this article is for general guidance only. The information presented should not be acted upon without the advice and guidance of a professional tax, legal, or financial adviser who is familiar with all the relevant facts.