5.8 Valuation methodology – adjusted net asset methods

Adjusted net asset valuation methods are used when there is no likelihood of finding any goodwill in the company. These methods are used when the net cashflows of the company indicate a poor yield on the investment or when the company is a holding company with investments in other companies or real estate or other major assets.

The adjusted net asset method is relatively simple to apply. The method involves starting with the balance sheet of the business and restating all assets and liabilities to their realizable values. Owners’ equity is therefore recalculated as the fair market value of all assets less the fair market value of all liabilities and this restated amount is the fair market value of the business.

An adjusted net asset method assumes that assets are more valuable as “retainers of value” than as “generators of income.

At MVI, we generally apply an income or cashflow method as the initial method for all operating company valuations. If, however, it becomes apparent during the calculations that there is no goodwill, we switch to the adjusted net asset method given that the assets are more valuable as “retainers of value” than as “generators of income.” There could be many reasons to continue to operate despite the poor returns, but the value of the company should be based on its assets and not its income generating capacity.

Adjusted net asset methods could be based on either a going concern assumption or a liquidation assumption.

There are two major business valuation methods classified as adjusted asset methods; the distinction lies in the status of the business:

  • Adjusted net asset valuation for a going concern business – the assets are valued as if they will continue to be used collectively, which will almost certainly be higher than if they were individually sold;
  • The liquidation method for a business with little prospect of continued operations – the assets are valued at their break-up values, likely to be well under their values on a going concern basis. It is also possible that the fair market value of the liabilities will also be less than their face value.

Contact MVI to discuss the valuation implications if your assets are providing a less than optimal return.