WFU Law School
Law & Valuation
Chapter 5 - Business Valuation

5.1 Business Valuation - Asset Methods

Sometimes a starting, and even ending, place in valuing a business is simply to value the business assets and then subtract the business liabilities - net assets. This approach is often easier and less expensive than a DCF/capitalization or market analysis. Although it might fail to capture the income potential of a business, it can provide a "reality check." If the value of selling the business assets is more than the estimated value of its future earnings, something is amiss. Either the estimates are wrong and should be recalculated, or perhaps the business should be liquidated!

5.1.1 - Book value

Book value is an accounting concept. It is simply the amount that the company's assets (net of depreciation, depletion and amortization) and total liabilities -- as carried on the company's balance sheet. (Sometimes book value is referred to as net book value, net worth or shareholders' equity.) This balance sheet figure does not measure the firm's earnings potential and often diverges from the market value of its net assets. (More 5.1.1>>)

5.1.2 - Adjusted book value

Sometimes the assets stated on the company's balance sheet can be adjusted to reflected fair market value -- that is, either their replacement value or their salvage value. This method of valuation may be appropriate for asset-intensive businesses with little value from goodwill or other intangible factors, not-for-profit organizations, or businesses to be purchased by a competitor in the same industry. (More 5.1.2>>)

5.1.3 - Liquidation (or salvage) value

Liquidation value is the amount that would be received if the company actually sold all of its assets, for their market value, and paid all its liabilities (including preferred stock). The remaining money, if distributed to shareholders, represents the firm's liquidation value per share. (More 5.1.3>>)

5.1.4 - Industry standard ratios

 


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Chapter 5 - Business Valuation

©2003 Professor Alan R. Palmiter

This page was last updated on: April 5, 2004