Asset-Based Approach - Explained
What is an Asset-Based Approach?
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Table of ContentsWhat is an Asset-Based Approach?How Does an Asset-Based Approach Work?Calculating Asset-Based ValueAdjusting Net Assets
What is an Asset-Based Approach?
An asset-based approach is a way of determining the value of a business giving focus to the net asset value which is calculated by deducting total liabilities from total assets. There could be some challenges of deciding which of the company's assets and liabilities to be calculated and also the worth to attribute to these assets.
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How Does an Asset-Based Approach Work?
The primary function of financial managers is to identify and maintain the value of a company because its rise or fall directly affects investors returns on investment. Asset-based approach is used to evaluate a business that is preparing for a sale or liquidation. Equity value and enterprise value are some of the ways to maintain the value of a company. These two can also be used with the asset-based approach for business valuation. Common to these two is equity, in the absence of equity, asset-based approach is deployed to evaluate value. Assets based value can be used by private companies in some types of analysis and also by stakeholders in business valuation comparison.
Calculating Asset-Based Value
The asset-based value by default is referred to as the company's book values or shareholders' equity. The value is summed up by deducting liabilities from assets. It is important to note that most times values of assets in the balance sheet may differ as a result of the time frame of the calculation or others. Also, some analysts may include certain insignificant assets in the evaluation which may differ from the one in the balance sheet.
Adjusting Net Assets
Having a conclusive asset-based valuation may be difficult because of the need to adjust net assets. Adjusting net assets is basically to identify the market value of assets and several factors affect this. Factors such as liabilities, balance sheet use of depreciation and intangibles. Market value adjustments can cause a fall or rise in the value of liabilities, this in turn affects the sum of the adjusted net assets. The evaluation in the balance sheet deploys depreciation to lower the value of assets, therefore, the asset-based value is not the same with the fair market value. Some other intangibles that are not given consideration by the company as a result of keeping trading secrets or company secrets on the balance sheet can indirectly affect market value. An asset-based valuation is one of the methods used in determining the value of a company and it's calculated by deducting liabilities from assets. To determine the net asset value of a company, the asset-based valuation needs to be adjusted.