Asset-Based Business Valuation Methods

What are asset-based and cost-based methods of business valuation and how are they used

Well, let's start with how are they used. Generally, you value a business based upon any number of factors

The baseline or bare minimum that a business is valued at is the value of its assets above all its debts that it owes

because you could go out and sell these assets and immediately generate liquid cash

So this is the bare minimum valuation. So what are some approaches to determine what are or what is the value of the assets of a business

Well, to start with, you look at book value. Book value is generally what it costs the firm minus any depreciation that has been recorded over time

Book value is often referred to as an accounting value. Often times there will also be another variation, a tax value, depending on how quickly you've

depreciated those assets. So the book value seeks to again record the initial cost of the asset to the company reduced

by any loss of valuation over time. Next would be liquidation value and this looks at simply what is the asset worth in the market now

If you were to go out and sell the asset in any number of scenarios, whether it's open

auction or market or fire sale where you have to liquidate everything, of course the value

would vary a little bit depending on the urgency of the situation or the need to raise capital

But you look at the value in the market and that will give you a good understanding of

the value of the assets. And then lastly, replacement value, meaning that if you had to go out there and buy it

This means that you taking the market price as it exists based upon existing levels of demand And this is a little bit different than liquidation value because it has less to do with urgency

of you liquidating the assets and receiving value back versus how many suppliers out there

of what you need to replace this with exists and what you'd have to pay to get that asset

from them. So it varies a little bit, but these are two similar approaches to determine an asset valuation

Now a couple of issues with asset valuation. As we discussed, it's the bare bones minimum

Generally companies are worth more than just their assets because as they go in concern

they use these assets to generate additional value. Now in the asset valuation method, a difficulty is intellectual property, particularly for

For startup ventures, intellectual property can be the most valuable asset held by the

entity, but because there's not a ready market for it and it can't be replaced with a similar

type of intellectual property based upon the unique nature of what it is, it's very difficult

to come up with an evaluation of what it's worth liquidating and how you would replace it

You can keep track of these things for accounting and tax purposes, particularly in the form

of goodwill or in the value attributed to it when contributed to the company in exchange

for an ownership interest of the company. But once again, this is not a true reflection of what it's really worth to the company or

worth out there in the market. So valuing intellectual property is extremely difficult

So if you can come up with an asset valuation for all the assets of the company, simply

subtracting all outstanding debts gives you this baseline valuation or cost-based or asset-based valuation of the company as a whole