Do Your Own Business Valuation – Part 8: Asset-Based Methods
There are 3 approaches to valuing a company – market, income and asset. This article covers the asset-based approach.
The asset-based approach breaks a company down in to its pieces and attempts to value each individual asset separately. For most physical and financial assets this is a fairly straight forward process. Third-party sources of market values and comparable sales data are available. A number of problems appear when dealing with intangible assets. Identifying every component of an intangible asset like goodwill is like peeling an onion. There are endless layers of factors that become increasing detached from reality.
For these reasons the asset-based approach is often applied to tangible assets only. The book values of all assets that would be included in the sale of the company are adjusted to their respective market values.
First, list the value of each asset as it is shown in your accounting records. The book value of inventory should come from a tax return, balance sheet, or trial balance. The book value of assets being depreciated should come from your depreciation schedule. Your CPA or tax preparer may keep this schedule for you. Only items of significant value should be listed individually. All other items should be valued as a group.
Now adjust each asset using the following methods:
Inventory – Adjust inventory to an estimate or actual physical count of what is currently on hand. Inventory should be valued at your cost. Only include inventory that is saleable.
Vehicles – Only include vehicles that are used in the business and that would be included in a sale of the company. Market values for cars and light trucks can be obtained from Kelley Blue Book at www.kbb.com. Search listings of commercial vehicles for sale on websites like TruckPaper.com.
Equipment – For large items with significant value you should attempt to estimate value by researching used equipment sales online or checking with the equipment vendor. For most other equipment a bulk estimate is often sufficient. For items that rapidly depreciate in value, like computer hardware, book value is usually a reasonable estimate. For other items a percentage of their original cost works well. A range of 30% to 60% is common. The age and condition of the items plus the market for that type of used equipment should be considered. For example, there is typically a lot of used restaurant equipment on the market, so it generally does not have much value.
Real estate – Use recent appraisals or tax assessment data to estimate value. If no recent appraisal is available and you choose not to get a new one, there are several options. Many real estate firms offer free market assessments. You can update the values from older appraisals by adjusting them for annual changes in the average sales prices of homes in your area. This information is often available from real estate agents, chambers of commerce, or websites like City-Data.com.
Other – List any other assets that would be included in a sale of the company and estimate their current value as best you can.
The total adjusted value of these assets is the value of your company without any goodwill.
The asset-based approach is most appropriate for companies with no intangible asset value – startups and companies with little or no earnings. The total adjusted tangible asset value is often used as the base value of a company since it excludes any and all intangible assets (goodwill). It is often used to determine the tangible asset portion of the value of a company using another method.