Chapter 17
The Asset-Based Approachtwdb
Summary
The asset-based approach is relevant for holding companies and for operating companies that are contemplating liquidation or are unprofitable for the foreseeable future. It should also be given some weight for asset-heavy operating companies, such as financial institutions, distribution companies, and natural resources companies such as forest products companies with large timber holdings.
There are two main methods within the asset approach:
1. The adjusted net asset value method
2. The excess earnings method
Either of these methods produces a controlling interest value. If valuing a controlling interest, a discount for lack of marketability may be applicable (see Chapter 20). If valuing a minority interest, discounts for both lack of control and lack of marketability would be appropriate in most cases.
Adjusted Net Asset Value Method
The adjusted net asset value method involves adjusting all assets and liabilities to current values. The difference between the value of assets and the value of liabilities is the value of the company. The adjusted net asset method produces a controlling interest value.
The adjusted net asset value encompasses valuation of all the company's assets, tangible and intangible, whether or not they are presently recorded on the balance sheet. For most companies, the assets are valued on a going-concern premise of value, but in some cases they may be valued on a forced or orderly liquidation premise of ...
