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 (NAV), or the fair-market value of its total assets minus its total liabilities, to determine what it would cost to recreate the business. There is some room for interpretation in the asset approach 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. The other two main approaches used for valuing businesses are the market approach, which looks at what similar businesses are worth, and the income approach, which estimates how much money the business might generate in the future.

BREAKING DOWN 'Asset-Based Approach'

The real value of assets in an asset-based approach for valuing a business may be much greater than simply adding up the recorded assets. For example, a company’s balance sheet may not include major assets such as internally developed products and proprietary methods of conducting business. If the company’s owner did not pay for the assets, they did not get recorded on the cost basis balance sheet. In addition, many businesses have special products or services that make them unique. Pricing those offerings as part of selling a business may be difficult due to their intangible value.

Adjusted Net Asset Method

The asset-based approach is best used when a business is nonoperating or has been generating losses, and the company’s focus is holding investments or real estate. The adjusted net asset method is commonly used for estimating the value of the business. The difference between the fair market value of the company’s total assets and the fair market value of its total liabilities determines the fair market value of the business.

Determining Fair Market Value of Assets

The asset-based approach begins by creating a financial picture of the company through information on the balance sheet. Current asset values may differ dramatically from the assets’ acquisition costs. Although the balance sheet lists assets and liabilities at historical cost, accurately using this method depends on recasting those costs and capturing the current value.

Assets are reviewed and the fair market value of each is obtained. For example, a landowner may work with a real estate appraiser to obtain the land’s fair market value. The owner may discover the land purchased for $1 million 10 years ago is now worth $3 million. The land is then restated at $3 million for the purposes of applying the net asset value method. The process is repeated for each additional company asset.

In contrast, liabilities are typically already stated at fair market value. In most cases, no additional calculations are needed. The fair market values of the assets are added up and the total liabilities are subtracted from the total. The difference is the estimated value of the business.

RELATED TERMS
  1. Market Approach

    A market approach is a method of determining the appraisal value ...
  2. Business Valuation

    Business valuation is the process of determining the economic ...
  3. Balance Sheet

    A balance sheet reports a company's assets, liabilities and shareholders' ...
  4. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
  5. Net Worth

    Net worth is a concept applicable to individuals and businesses ...
  6. Liability

    Liabilities are defined as a company's legal debts or obligations ...
Related Articles
  1. Investing

    Investment Value Vs. Fair Market Value: How They Differ

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
  2. Investing

    Cash Flow Lending Vs. Asset-Based Lending

    When companies need financing, they rely on two primary forms of lending: cash flow-based and asset-based lending. We look at the pros and cons of each.
  3. Investing

    What is Net Worth?

    Net worth is the amount by which assets exceed liabilities. Another way to say this is, it's the value of everything you own, minus all your debts.
  4. Investing

    Reviewing Liabilities On The Balance Sheet

    As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.
  5. Investing

    How to Analyze a Company's Financial Position

    Find out how to calculate important ratios and compare them to market value.
  6. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
  7. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  8. Financial Advisor

    2 Stocks Below Net Currrent Asset Value (GEOS, TWMC)

    Investing in net current asset bargains is not easy but it can be very profitable
  9. Investing

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
RELATED FAQS
  1. What is the difference between a fixed asset and a current asset?

    Discover the difference between fixed assets and current assets and the value of each to a company. Learn the category and ... Read Answer >>
  2. What is the difference between economic value and market value?

    Learn about the differences between economic value and market value. Discover how they serve different purposes for businesses ... Read Answer >>
  3. How do you calculate company equity?

    Find out more about company equity, or shareholders' equity, what company equity measures and how to calculate a company's ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center