4.27: Tangible asset backing
“Tangible asset backing” is a term found in valuators’ reports that refers specifically, and only, to the net tangible assets that support the normal day to day operations of the business enterprise. TAB excludes redundant assets and does not take account of term debt.
TAB refers only to the assets that support normal operations of the business enterprise.
TAB is usually calculated as follows:
Net working capital
– Less, redundant working capital
+ Plus, capital assets used in the business at fair market value
+ Plus, tax shield associated with the difference between the tax value and the FMV of capital assets
If TAB is deducted from the enterprise value (when calculated as capitalized cashflows), goodwill is the result. If TAB exceeds enterprise value calculated as capitalized cashflows, there is no goodwill and the enterprise value equals TAB.
In the context of the fair market value of the company’s equity, TAB can be shown in the following equation:
Equity value = TAB plus Goodwill (if any) plus redundant assets less term debts less shareholder loans
Contact MVI for a more complete discussion of TAB and Section 5.20 for a simple example.