Loading the player...

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.

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.

  1. Business Valuation

    Business valuation is the process of determining the economic ...
  2. Asset-Based Approach

    Asset-based approach is a type of business valuation that focuses ...
  3. Asset Valuation

    Asset valuation is the process of determining the fair market ...
  4. Book Value

    An asset's book value is equal to its carrying value on the balance ...
  5. Appraisal Right

    An appraisal right is the right to determine a fair stock price ...
  6. Times Revenue Method

    The times revenue method is a valuation method used to determine ...
Related Articles
  1. Investing

    Market value versus book value

    Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future.
  2. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  3. Investing

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  4. 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.
  5. Small Business

    Valuing Startup Ventures

    Valuing a company is a difficult task, regardless of the size of the business - but these methods can help.
  6. Investing

    Cheap Stocks or Value Traps?

    The value of stocks that trade at less than cash per share can be deceiving.
  7. Investing

    Warren Buffett and Berkshire's Productive Assets

    Here are some methods to measure whether an investment will be "productive."
  8. Investing

    Deep Discount-To-Book Value Stocks

    With the right company, buying at a discount-to-book value could prove fruitful.
  1. What is the difference between carrying value and fair value?

    Learn about the carrying value and fair value of assets and liabilities, what the carrying and fair value measure and the ... Read Answer >>
  2. Intrinsic Value vs Current Market Value

    Discover the differences between intrinsic and market values, what makes the former difficult to determine, and how investor ... Read Answer >>
  3. How is market value determined in the real estate market?

    Learn how fair market value is determined during a real estate appraisal and how market values are really decided by professional ... Read Answer >>
  4. Enterprise value versus market capitalization

    Learn the difference between market capitalization and enterprise value, and understand how these two common valuation tools ... Read Answer >>
Trading Center