Getting an accurate value for a business is an important step in selling the business. There are numerous different methods of evaluating a business, but asset-based valuation is one of the most common, basic, and widely accepted methods.
If you intend to sell your business, you should be aware of the following five things about asset-based valuation:
The asset-based valuation method involves breaking a company down into small parts and comparing assets to liabilities.
The asset-based method of evaluating a business breaks a business down into parts that add money and parts that detract money from the business. The parts that add money are assets and the parts that detract money are liabilities.
While this is a helpful and basic method of evaluating a business, it doesn't necessarily take into account the income that the business is expected to earn in the near future. It is more a financial snapshot of a business at any given moment rather than an indicator of a business's potential.
Valuation of a business with the asset-based method will arrive upon the book value of the business in question.
The asset-based method allows what's known as the "book value" of the business to be determined. The book value is basically the amount of equity the owner has in the company on the balance sheet.
This method is ideal if valuation is needed to facilitate the sale of a company.
It's important that the asset-based method is used to determine the book value of a company if that company is to be sold.
While some of the other business valuation methods- including the market method or the income method- may also be necessary to facilitate the sale, the asset-based value is generally a necessity to establish a fair sale price for the business.
A healthy, profitable business might be sold for a higher price if it is valuated using another method.
The asset-based method might solely be used for business valuation if the company is no longer showing any income. However, other methods of valuation are best for ascertaining the value of a healthy company that is still making money because they are better indicators of the company's potential.
The book value should generally be the lowest possible price that will be accepted for the sale of a company.
A business owner interested in selling should know that the asset-based value is the absolute minimum that should be accepted for the company. Accepting less than the asset-based value means that the business owner is taking an unnecessary and unfair loss on the sale.