Asset-Based Approach

An asset-based approach is a type of business valuation that focuses on the net asset value of a company. The net asset value is identified by subtracting total liabilities from total assets. There can be 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.

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

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.

Oftentimes, the value of assets minus liabilities can be different than the values 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.

One of the biggest challenges in arriving at an asset-based valuation is the adjusting of 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 but since an adjusted asset-based approach looks at what a company could potentially sell for in the current market these intangibles would be 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.