BALANCE SHEET METHODS OF VALUATION-

BALANCE SHEET METHODS OF VALUATION

These methods of valuation are most often employed when the business under examination generates most of its earnings from its assets rather than from the contributions of its employees.

These methods are also used, “when the cost of starting a business and getting revenues past the break-even point doesn’t greatly exceed the value of the business’s assets.”

Liquidation Approach— The liquidation approach is one of the primary business valuation methods available. It is used when the company is determined to no longer be a going concern and liquidating the assets would yield a higher value than the present value of its future earnings and cash flow potential. This method assesses the value of a business by gauging its value if it were to cease operations and sell its individual assets.
Under this approach, the business owner would receive no compensation for business “goodwill”—nontangible assets such as the company’s name, location, customer base, or accumulated experience. This method is further divided into forced liquidations (as in bankruptcies) and orderly liquidations.
Values are typically figured higher in the latter instances. Asset-based lenders and banks tend to favor this method because they view the liquidation value of a company’s tangible assets to be the only valuable collateral to the loan.
But it is unpopular with most business owners because of the lack of consideration given to goodwill and other intangible assets.
Asset Value Approach— An asset-based valuation is a form of valuation in business that focuses on the value of a company’s assets or the fair market value of its total assets after deducting liabilities. Assets are evaluated, and the fair market value is obtained. This approach begins by examining the company’s book value.
Under this method, items listed on a business’s balance sheet (at historical cost levels) are adjusted to bring them in line with current market values. In essence, this method calls for the adjustment of an asset’s book value to equal the cost of replacing that asset in its current condition.
This method is most often used to determine the value of companies which feature a large percentage of commodity-type assets. The net asset value method, also referred to as net worth or owner’s equity, is one of the more commonly employed of all valuation approaches.
While flawed in some respects, the net asset value method is popular because this approach can be easily figured from existing financial records.

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