As part of the due diligence process, whether an M&A or a private equity transaction of some sort, a valuation of the company that is being acquired is mandatory, both for the buyer (the acquiring company) and the seller (the target company). This, of course, is for the benefit of all parties involved in the process. In many instances, this requires one (or perhaps multiple) business appraisal techniques. One of the many methods used for valuation of a company is asset-based valuation.

 

What Is Asset-Based Valuation?

Asset-based valuation is a method of valuing a business. It focuses on the current value of the company’s assets — assets minus liabilities — and when all is said and done, a fair market value of its assets is determined. Needless to say, similar to other types of financial investigations, valuations are based on many factors, including original price, appreciation and depreciation of assets and liabilities of all types, along with pricing intangible items, such as intellectual property (IP). In short, it’s a “simple assets minus liabilities” type of formula, but, of course, each item must be evaluated on its own worth. These include the following.

 

  • Tangible assets: Tangible assets, as the name implies, are physical items that are considered assets for any company. This includes cash (and cash equivalents), inventory and accounts receivable, among other things.
  • Intangible assets: This includes intellectual property, which includes copyrights, trademarks, patents and licenses, along with goodwill.
  • Non-operating assets: These are assets that a company may own but that are no part of its day-to-operations. Vacant land, short-term investments and marketable securities fall into this category.

 

When Is Asset Valuation Used?

In most instances, the asset-based valuation approach is used during an M&A, purchase or sale of a business. It’s also employed when the price of the business is directly tied to its assets (both tangible and intangible), rather than to the value of the company’s stock. For example, it can be used for both asset holding companies as well as asset operating companies. It differs from the cost-based approach, which is generally used to value property, as opposed to asset-based valuation, which is used to measure the value of a business. In some circumstances, asset valuation is used individually, while some use it in tandem with other traditional valuation methods

 

Different Methods of Asset-Based Valuation

Like other types of valuations, there are a couple different methods of asset-based valuation including:

 

  • Going concern: Also known as “total value,” going concern valuation is a model that makes the assumptions that the company will remain in business for perpetuity as well as remain profitable. It is typically used as a valuation technique for a company that is not necessarily selling its assets but that plans to continue to operate and wants to know “what it’s worth.” Going concern value is almost always higher than liquidation value, as described below.
  • Liquidation value: This is a situation in which a company is usually in financial trouble or in the liquidation process. As opposed to the going concern example listed above, the valuation is based on the current market value of its assets minus its liabilities. This tends to price it below “market value,” as the sale of its assets are sold in more of a “fire sale” type of scenario.

 

The Pros and Cons

As is the case with other types of valuation, there are pros and cons to asset-based valuation.

 

Pros:

  • Delivers a fair current market value
  • Can be used for both equity and enterprise value, provided there is no equity in the equation
  • Allows for flexibility when deciding which assets and liabilities are being considered for valuation, as well as flexibility when it comes to measuring the value

 

Cons:

  • Often ignores a company’s future earning potential
  • Valuing intangible assets can be a challenge
  • A “fire sale” value of assets can severely underestimate its true value

 

Working With a VDR

Dealing in the complex world of valuations and M&As requires additional tools to streamline and make the entire transaction more cost-efficient. One of the indispensable tools is a virtual data room (VDR), which is a highly secure online location, a place where all parties involved in a transaction can safely and securely share and store the required documentation. The features of a sophisticated VDR consist of secure access (which includes enterprise-level encryption), multiple layers of security and user-friendly admin controls. In addition, there are customizable rights management tools that will grant only certain parties access to certain documents, all of which assist in shortening the timeline and the expense of the transaction.

 

CapLinked is an industry leader in the VDR space, delivering online workspaces that are secure yet user-friendly. CapLinked VDRs feature an interface that is compatible with virtually every OS, giving users the ability to upload and download documents from virtually any type of computer, tablet or smartphone. Sign up for a free trial to see its management features, document collaboration controls, customizable permissions and more.

 

Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.

 

Sources

Wall Street Mojo – What is Asset-Based Valuation?

Corporate Finance Institute – What is Asset-Based Valuation?

The Ascent – What Are Assets? A Primer for Small Business Owners