Valuing a Business

4. Asset Valuations

Add up your assets, take away your liabilities, and you have the asset valuation. This method does not take account of future earnings.

4.1 Use asset valuation if you have a stable, asset rich business.

• Property or manufacturing businesses are good examples.

4.2 The starting point for an asset valuation is the assets that are stated in the accounts.

• This is known as the 'net book value' (NBV) of the business.

4.3 You then refine the NBV figures for the major items, to reflect economic reality. For example:

• Property or other fixed assets which have changed in value.
• Old stock which would have to be sold at a discount.
• Debts to the business that are clearly not going to be paid. (Or, conversely, over-conservative provisions for bad debts.)
• Intangible items, such as software development costs, should usually be excluded.

4.4 Consider the future status of the business.

If a business is going to cease trading, it will lose value due to:

• Assets being sold off cheaply. For example, equipment sold off at auction may only achieve a fraction of its book value.
• Debt collection being harder.
• The cost of closing down premises.
• Redundancy payments (if applicable).