What is the asset-based approach to business valuation?

The asset-based approach starts from the balance sheet and works toward what the assets are worth to the market. BDC’s glossary describes it as taking information from the balance sheet to estimate the fair-market value of the company’s assets, then subtracting total debts, which gives the net asset value. This page covers when the sources say it is used and the two common variants BDC names. It gives no figures.

Two common variants BDC names

BDC names two common asset-based approaches: adjusted book value, where liabilities are subtracted from the fair market value of the assets, and liquidation value, where liabilities are subtracted from the amount the assets could sell for in a liquidation sale, minus liquidation expenses. CBV Institute’s glossary defines the adjusted net asset value method as adjusting assets and liabilities, including off-balance-sheet assets, intangible assets and contingent assets or liabilities, to market values or another appropriate standard of value, and says it is also known as the adjusted book value method. BDC lists using the book value of assets rather than fair market value among common errors when entrepreneurs value a company without a chartered business valuator.

When the sources point to it

BDC says asset-based approaches are typically used for businesses whose value is asset-related rather than operations-related, with real estate as its example, and are also applied when a business does not generate a sufficient return on the assets employed or is expected to be liquidated. The CRA’s Information Circular 89-3, on valuations for income tax purposes, says asset value methods are useful where starting a business from scratch is a reasonable and viable alternative to buying one, or where the business sells largely on an asset basis, deriving its income largely from its assets rather than from the personal efforts of its owners and personnel. BDC adds that the valuator may in some cases need an equipment or real estate appraiser.

Going concern or liquidation

CBV Institute’s glossary defines liquidation value as the amount, net of relevant costs, realized if the business is terminated and the assets are sold, and going concern value as a premise of value that assumes an ongoing commercial enterprise with a reasonable expectation of future earning power. The circular says that, generally speaking, the fair market value of a business is usually the greater of its liquidation value and its going concern value. The glossary describes the asset approach as summing the value of the assets, net of liabilities, each valued by the market, income or cost approach. It defines the cost approach as reflecting the principle that a buyer will generally pay no more for an asset than the cost to obtain another of equal utility, whether by purchase or by construction. See book value and what a business is worth.