Asset-Based Approach to Valuation

This chapter explores the asset-based approach to valuation. It first underscores the advantages and weaknesses of owner’s equity recorded on the balance sheet as an indicator for the value of a company. The majority of the chapter explores the adjusted net asset value method (ANAV method), which improves the quality of the balance sheet by adjusting and updating accounting or book values. The goal is to replace historical cost data with current market data and eliminate non-recurring items. The ANAV method evolves in its degree of complexity depending on the relative size and nature of intangible assets. The capitalized excess earnings method (CEEM) attempts to capture and value significant goodwill. This book does not address the tax consequences of the various adjustments and asset revaluations (deferred income tax liability). The assumption is that no core or non-core asset sale is planned in the short term, and the business is considered an independent and going concern entity. Calculating the tax impact requires the intervention of a chartered accountant or a lawyer who specializes in tax law; this topic is beyond the scope of this book. Several short case studies and illustrations are included. Key takeaways on the asset-based method and its limitations conclude the chapter.