Asset valuation is the process of determining the current value of a company's assets, such as stocks, buildings, equipment, brands, goodwill, etc. This process often happens as part of a wider business valuation, or before you buy, sell or insure an asset.
Asset-based valuation allows you to calculate a business's net worth by adding up the current value of its assets less the value of its liabilities.
How to value business assets?
The first step in asset valuation is to understand the different types of business assets that you own. Look at your resources and create an inventory of all your:
- current assets
- fixed assets
- intangible assets, including intellectual property (IP)
Consider both your tangible and intangible assets. It can help to evaluate different types of assets separately.
How to calculate the value of tangible assets?
The starting point for determining the value of tangible assets is the net book value (NBV), which is the value of the assets stated in the accounts. This method suits mainly stable businesses with significant tangible assets.
When valuing tangible assets, you can adjust the NBV figures to take into account economic realities such as:
- property or other fixed assets which have changed in value
- old assets or stock which would have to be sold at a discount
- bad debts to the business
The value of many kinds of tangible assets - like machinery and equipment - often depreciates over time due to wear and tear. You will need to consider this when valuing such assets. See more on depreciation of assets.
Besides age and usage, other factors can affect the value of assets. One example is bankruptcy, where asset liquidation value will typically be lower than its fair market value.
How to calculate the value of intangible assets?
Intangible assets often give businesses their competitive advantage. However, because they have no physical characteristics, their value can be hard to determine.
A common way of valuing intangible assets, including IP but excluding goodwill, is by using either:
- market approach - based on market evidence of what third parties have paid for comparable intangible assets (in practice, this method can be difficult to apply)
- income approach - assumes that the value of an asset is the present value of future earnings from the asset
- cost approach - based on estimating the costs of constructing or acquiring a new intangible asset that is of more or less the same use as the existing one
These methods look at things like comparable transactions, excess earnings, relief from royalty, replacement or reproduction costs and simulation analysis.
You can generally determine the value of goodwill based on the calculation of a residual value, by subtracting the net value of assets from the value of equity of the business.
Unlike tangible assets, which depreciate over time, intangible assets (and intellectual property in particular) often increase in value with time. However, accountancy rules don't allow for such an increase in value to be included in the balance sheet. Consider seeking professional advice or consult an accountant when valuing intangible assets.
Find out more about valuing your intellectual property.
FAQs
Asset Method: This method is simply calculated by taking the difference between business assets and liabilities. For example, if you have $100,000 in assets and $20,000 in liabilities, the value of your business is $80,000 ($100,000 – $20,000 = $80,000).
What are 3 examples of why a company would perform business valuation? ›
Common reasons for performing a valuation are for M&A, strategic planning, capital financing, and investing in securities.
How do you decide how much your business is worth? ›
Add up the value of everything the business owns, including all equipment and inventory. Subtract any debts or liabilities. The value of the business's balance sheet is at least a starting point for determining the business's worth. But the business is probably worth a lot more than its net assets.
What are the three important elements of asset valuation? ›
The 3 Elements of Valuation: Assets, Earnings Power and Profitable Growth
- The value of the assets. “We begin with the balance sheet and examine the value of the company's assets at the end of the most recent operating period, as determined by the company's accountants. ...
- Earnings power value. ...
- The value of growth. ...
- Summary.
The Revenue Multiple (times revenue) Method
A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000.
How many times revenue is a business worth? ›
Under the times revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue.
How does Shark Tank calculate valuation? ›
A revenue valuation, which considers the prior year's sales and revenue and any sales in the pipeline, is often determined. The Sharks use a company's profit compared to the company's valuation from revenue to come up with an earnings multiple.
What is the formula for valuation? ›
Company valuation = Debt + Equity – Cash
Since the enterprise value method considers every source of capital, investors can rely on this valuation to neutralise market risks. However, using the enterprise value method to determine the company worth for high-debt industries can lead to incorrect conclusions.
What is the most popular business valuation method? ›
Multiples, or Comparables approach
This approach is by and large the most common approach to valuing businesses. This is mainly due to the fact that it is a straight-forward and easy to understand method. The valuation formula used is fairly basic once you have the right inputs.
How much is a business worth that makes 100k a year? ›
Factors affecting small business valuation
Thus, buyers have to approach the deal as if they are purchasing a job. Businesses where the owner is actively-involved typically sell for 2-3 times the annual earnings of the company. A business that earns $100,000 per year should sell for $200,000-$300,000.
Now, how is valuation calculated in Shark Tank? The group of entrepreneurs uses four valuation methods – Future Market Valuation, Earnings Multiple, Revenue Multiple, and the Intangibles of Valuation.
What is a company asking $50000 for 5% equity What is the company valued at? ›
If a company is asking for $50,000 for 5% equity they are valuing themselves at $1,000,000.
What are the four common forms of improper asset valuation? ›
Liability omissions, significant events, management fraud, related-party transactions, and accounting changes. 12-11 What are the four common forms of improper asset valuation? Inventory valuation, Business combinations, accounts receivable, and fixed assets.
What is the most common method to value an asset? ›
There are many different methodologies, but the most common are the cost approach, the market approach, and the income approach. The cost approach considers how much investment was required to build the asset in question — or how much it would cost to replace it.
What are Level 3 fair value assets? ›
Level 3 assets are financial assets and liabilities whose fair value cannot be easily determined. Now known as Accounting Standards Code Topic 820, FAS 157 is the Financial Accounting Standards Board (FASB)'s fair value accounting standard.
What are the three 3 commonly used business valuation approaches? ›
The three widely used valuation methods used in business valuation include the Asset Approach, the Market Approach, and the Income Approach.
What are three examples of business value? ›
Common business value categories include:
- business growth.
- customer service.
- decision-making.
- teamwork.
- leadership.
- staff.
- business culture.
- social community.
BUY/SELL AGREEMENTS
A valuation may be necessary for a business to develop a buy/sell agreement. These agreements can serve tax or business purposes. If a sale involves related parties, a valuation might be necessary to ensure a proper value for estate and gift tax purposes.
What are examples of company valuations? ›
For example, if a real-estate company named ABC has a forecasted earning of $19 million and the required rate of return is 12%, the business valuation would be $19 million/12% = $158.33 million.
