What’s My Business Worth? Part 1: The Asset Method
“What’s my business worth?”

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The Asset Method
There are three basic ways to value a business: the Asset, Income and Market methods. This post examines the Asset Method. Next week I’ll discuss the Market Method. The article I read stated that, “The asset approach to valuation may be the most straightforward method because it is based directly on the value of a company’s assets less any liabilities it has incurred.”
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Though the Asset Method is certainly one way to value a business, businesses sold for the value of their assets are generally businesses with earnings that are so low – or nonexistent – that the value of those earnings is less than the value of the assets that produce them. This suggests that the assets might be used more profitably if they were producing something else – or in the hands of better management – a condition that further suggests that the business that owns the assets is in trouble. The asset approach is used in certain circumstances, most notably – but not exclusively – in distressed or bankruptcy situations. But some businesses are more valuable when broken up and, in certain circumstances a business may be asset-heavy. How the asset approach impacts value depends on various aspects of the assets. Are they tangible or intangible? Will the assets have to be moved? If so, what is the “in-place” value versus the “relocation-value”? Are the assets obsolete or nearing obsolescence? Are the assets intellectual property such as a patent or trademark? In our experience, if the Asset Method of valuation results in a business’ highest value, we’re looking at a turn-around situation or, in the worst of cases, a liquidation.The Bottom Line
We often use the Asset Method of valuation as part of our valuation process but the result of this method is almost never a legitimate consideration in our final calculations. Financial buyers are almost always interested in the answer to this question: “How much money will this business put in my pocket?” And the buyers of most small businesses – those with valuations of under $2 or $3 million – are financial buyers. As you will see in next week’s post, this suggests that the Asset Method of valuing a business is, in most cases, much less important than the Income and Market methods. If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast. I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com