DEFINITION of Modified Book Value
The asset valuation approach to valuating a company assumes that the value of a firm can be determined by estimating the value of the underlying assets. One asset valuation approach, modified book value, is a way of determining the value of a business by adjusting the worth of its assets and liabilities according to their fair market value. For example, marketable securities held by the firm may have a market value that is quite different from their historical value; the same may be true for real estate.
Understanding Book Value
BREAKING DOWN Modified Book Value
The modified book value technique also includes the value of all of the business's intangible assets, assets that are not physical such as goodwill, and liabilities, e.g., pending litigation. An intangible asset is an asset that is not physical in nature such as intellectual property or patents, while tangible assets include land, vehicles, equipment and inventory.
Stated simply, the value of the business in this method equals the value of the restated assets minus the value of the restate liabilities.
Liquidation value and replacement value are two other asset-based valuation methods. Businesses are also commonly valued using market multiple methods, capitalization rates, excess earnings or discounted cash flow. Companies that specialize in business valuation can be hired to determine a business's value for a number of purposes, including a merger or acquisition, shareholder transactions, estate planning and financial reporting.
Modified Book Value: Pro and Cons
The advantage of the modified book value approach to valuation is that it requires the most in-depth examination of the business of all the asset-based valuation methods. The individual asset valuations provide a clear understanding of where the business generates the greatest value, and that improves the negotiating process by attributing value to specific assets. The major disadvantage of this method is the high cost associated with hiring several specialized appraisers. This asset-based method is also more time consuming than the other methods.
Other Ways to Valuate a Company
Businesses can be valued in several ways. Some of these methods include: market capitalization, which is calculated by multiplying the company’s share price by its total number of shares outstanding; times revenue method, where a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the company's industry and economic environment; earnings multiplier; discounted cash flow (DCF); and liquidation value, the net cash that a business would receive if its assets were liquidated and its liabilities were paid off today.