Using the Assets Business Valuation Method
In some cases the balance sheet of a business is a good arbiter of the value
of a business - as long as it has been reviewed and adjusted correctly.
The assets method of business valuation is used when there is insufficient EBITDA to capitalise and infer a business value.
We will walk you through the valuation process and show you some of the adjustments that need to be made so it reflects market value.
When should The Assets Business Valuation Method Be Used?
If you had a taxi business, it paid you a good wage but there was no profits left over once you have paid all costs, then what is the value of the business? Let's assume that in this example ride sharing and industry deregulation has already happened.
In this case you have a collection of assets:
The vehicle itself - assume it is has a market value $25k
The taxi licence. - assume it is has a market value $2k
In essence this represents the value of your business - because there is no profit left to capitalise into goodwill. In previous times the value of the licence would be a lot higher (sometimes valued as high as $500k - but rarely with profits to substantiate this asset value).
So when a business is not commercially viable (has a return on invested capital of 15%+ or an EBITDA margin of 10%+) then it is likely the assets method is the best business valuation method to apply.
Lets look at the details of this business valuation method.
The Assets Method Business Valuation Formula
In essence the business valuation formula for this method is based on the business balance sheet:
Enterprise Value = Total Assets + Unreported Intangible Assets - Less Cash - Less entity-related liabilities - Unreported Liabilities (contingent and non-contingent).
Wee have detailed the items that should be used to adjust the reported assets and liabilities in our Business Valuation Calculation Guide.
Go to Our Business Valuation Calculation Guide
First read the guide under the heading introduction so that you understand when to apply this method and how to determine whether your business is commercially viable.
Go to the Assets Method section of the guide and estimate the various adjustments to be applied to the balance sheet.
Fill in the relevant table in the Assets Method section of the Guide to calculate the enterprise value of your business
Now return to the main Online Business Valuation Calculation page and and continue through the flow chart.
When To Use This Business Valuation Method
This method is primarily used when the business does not have sufficient EBITDA to capitalise. In some cases it is the preferred method if the business is in financial distress, as the value of the business becomes the value of its individual components.
In this case it is important to understand the standard of value that is to be used in these circumstances. Is the business being valued as a going concern (even if a business is not making profits or in some form of distress it may still be a going concern) or whether some other standard of value is appropriate.
In cases where there is a small level of goodwill calculated using the market method or income method, we may use the assets method to provide a cross-check, as this would represent the lower "floor" business value.
Now return to the main Online Business Valuation Calculation Guide and and continue through the flow chart.
This valuation process and information is general in nature and is to be used at your own risk and discretion. We take no responsibility for any errors in calculation or judgement that you may make based on our information or advice.
We are not responsible for any commercial loss you may realise as a result of relying on the information or analysis that you complete.