Valuation Approaches: The Asset Approach
The value of asset-based analysis of a business is equal to the sum of the individual assets, let corresponding debts. The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. Whenever possible assets are adjusted (up or down) to current Fair Market Value (FMV). (Adjusting would transform the “book value” method to the “adjusted book value method”)
In contrast to the income-based approaches, which require the valuation professional to make subjective judgments about capitalization or discount rates, the adjusted book value method is relatively objective.
In large part this valuation methodology cannot account for:
- Risk factors present in the business
- Growth Prospects
- Intangible assets and corresponding value