An intuitive and very basic way of valuing a business is to look at how much its net assets are worth at fair market value. Balance sheets use historical numbers according to GAPP, but when you are valuing the items on the balance sheet it doesn’t make sense to use historical numbers. Instead you need to look at the market value of the assets and liabilities.

Process

If you add up market values of all the assets and subtract off the liabilities then you will (hopefully) have something left over, which is the owner’s equity and the value of the business according to this approach. You would also need to subtract off any disposition costs such as real estate or legal fees. The other way to do it is to take the equity section of the balance sheet and add or subtract the differences between the historical numbers (reported in the balance sheet assets and liabilities) and the market values.

Formulas

Market Value of Assets – Liabilities – Disposition Costs = Shareholders’ Equity = Value of Company

Or

Shareholders’ Equity (from balance sheet) +/- Market Adjustments for Assets and Liabilities – Disposition Costs = Value of Company

Useful For Full Takeovers

Since it takes time and money to figure out the market values of all the assets, this approach is not realistic in most cases. The only time this approach is generally used is when one company or person is taking over another company in its entirety.

Useful for Asset Heavy Businesses

This approach may make sense if the business’s value is mainly in the assets, like a corner store. It wouldn’t make sense for something like a consulting company where the value is mainly in the expertise. However, it may be accurate if the expertise won’t be transferred with the company. For example, a one-man consulting company would only be worth the net market value of the assets if that one consultant was leaving with the sale of the company.

Goodwill

Goodwill is the amount of value in the company or brand that is not reflected in any material assets. It could be the value in a trademark or location or something like that. In this approach goodwill is not taken into account. It is common for small business to be valued using this method only and if some amount of goodwill to be added if appropriate.

More:
5 Ways to Value a Private Business

Tags: business valuation, net asset approach, net assets
Categories: Lesson, Bachelor of Commerce, Entrepreneurship, Business