Your Company Is Worth As Much As Somebody Else Is Willing to Pay For It

Asset-Based Valuation Methods

Asset based-valuation methods have to do with adjusting the accounting asset values. These may include adjustments to their market value, liquidation value or estimating the current replacement value of existing assets.

Economic Book Value Calculation

A popular form of asset-based valuation is to adjust accounting book values of assets, both tangible and intangible, to their current market values and to deduct liabilities. This will give you an economic book value which is different from its accounting value in the books.

Liquidation Value Calculation

This approach is similar to the above valuation method and the main difference is that it uses an estimated value of assets at liquidation less the cost of liquidation which is different from the market value of assets. Hence, the resulting liquidation value of the business should be lower than its economic book value (market adjusted book value).

Valuation at Replacement Cost

Replacement cost valuation looks at the current replacement value of the business and tries to give an answer to the question of how much it would cost to build the same business assets today from scratch. The assets involved are not just buildings and technology but also financial assets, proven reserves, customers, etc., depending on the sector. This valuation technique must also consider the time factor. One can build retail outlets relatively fast but winning customers can take time so you need to include the additional operating costs in the calculation of the replacement value.

The valuation at replacement cost is sector specific and it is usually done by the business sector specialists. The resulting value is often well above the market valuation of similar publicly traded companies or transaction values from the past acquisitions in the given sector. It is best to use this valuation technique in conjunction with other metrics to give you better understanding of the maximum value of the given business. When comparing its results with a peer group you should keep in mind that public and/or transaction statistics include partially depreciated tangible assets but your replacement cost valuation does not. Hence, it will be necessary to adjust your valuation for depreciation and amortization in order to make it comparable.

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