Asset-Based Approach: Calculations and Adjustments

What Is an Asset-Based Approach?

An asset-based approach is a type of business valuation that focuses on a company's net asset value. The net asset value is identified by subtracting total liabilities from total assets. There is some room for interpretation in terms of deciding which of the company's assets and liabilities to include in the valuation and how to measure the worth of each.

Understanding an Asset-Based Approach

Identifying and maintaining awareness of the value of a company is an important responsibility for financial executives. Overall, stakeholder and investor returns increase when a company’s value increases, and vice versa.

There are a few different ways to identify a company’s value. Two of the most common are the equity value and enterprise value. The asset-based approach can also be used in conjunction with these two methods or as a standalone valuation. Both equity value and enterprise value require the use of equity in the calculation. If a company does not have equity, analysts may use the asset-based valuation as an alternative.

Many stakeholders will also calculate the asset-based value and use it comprehensively in valuation comparisons. The asset-based value may also be required for private companies in certain types of analysis as added due diligence. Furthermore, the asset-based value can also be an important consideration when a company is planning a sale or liquidation.

Calculating Asset-Based Value

In its most basic form, the asset-based value is equivalent to the company’s book value or shareholders’ equity. The calculation is generated by subtracting liabilities from assets.

Often, the value of assets minus liabilities differs from the value reported on the balance sheet due to timing and other factors. Asset-based valuations can provide latitude for using market values rather than balance sheet values. Analysts may also include certain intangible assets in asset-based valuations that may or may not be on the balance sheet.

Adjusting Net Assets

One of the biggest challenges in arriving at an asset-based valuation is adjusting net assets. An adjusted asset-based valuation seeks to identify the market value of assets in the current environment. Balance sheet valuations use depreciation to decrease the value of assets over time. Thus, the book value of an asset is not necessarily equivalent to the fair market value.

Other considerations for net asset adjustments may include certain intangibles that are not fully valued on the balance sheet or included on the balance sheet at all. Companies might not find it necessary to value certain trade secrets. However, since an adjusted asset-based approach looks at what a company could potentially sell for in the current market, these intangibles are important to consider.

In an adjusted net asset calculation, adjustments can also be made for liabilities. Market value adjustments can potentially increase or decrease the value of liabilities, which directly affects the calculation of adjusted net assets.