The asset approach to business valuation values the assets of the business minus the liabilities. The asset approach is one of the four primary business valuation approach, and it also happens to be the simplest business valuation method. The glossary published on Business Valuation Resources defines the asset approach as “a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.” We will go over the various adjustments that might be made to the assets and liabilities in order to calculate the net assets, which is equivalent to the equity of the business (assets – liabilities = equity).
It is typically only used as a valuation “floor value,” or lowest value that a business buyer would value the company they are looking to purchase. Additionally, the asset approach to business valuation might be used due to a liquidation, either orderly or forced, as the business is not expected to be a going concern moving forward. In essence, the specific business will not be operating into the future, so the business buyer will need to understand the value of the net assets. The most popular approach to this would be to value the assets at fair market value, then subtract the liabilities at fair market value. This is referred to as the adjusted net assets method, which falls within the asset approach. By valuing both assets and liabilities at fair market value, the business buyer can have a strong understanding of the remaining equity value of the business.
How is it calculated: identify the fair market value of the assets (both on and off balance sheet) and then subtract the fair market value of the liabilities
When to use it: Best used for a business buyer that is only interested in the net assets of the business, a business seller looking to liquidate their business as quickly as possible, or in situations where there is little profitability and future profitability is questionable