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Business valuation

Asset based valuation

2.1 Introduction to asset based valuation

In this method the company is viewed as being worth the sum of the value of its
assets. Remember to deduct borrowings when arriving at an asset value if just the
equity is being acquired, but not if only the physical assets and related liabilities are
being purchased without acquiring any liability for the borrowings.

2.2 Alternative asset valuation bases

 Book value

Value is largely a function of depreciation policy.

For example, some assets may be written down prematurely and others
carried at values well above their real worth.

Thus, this method is of little use in practice.

 Replacement value

Useful for the buyer.

if the buyer wants to estimate the minimum price that would have to be paid
to buy the assets and set up a similar business from scratch (especially if
an estimate of intangible value can be added on).

 Breakup value/Net realisable value

Useful for the seller.

Considers the amount they would receive if they were to liquidate the
business as an alternative to selling the shares.

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