Asset-Based Valuation Methods

If you have a successful eCommerce company that you’re looking to sell, the first thing you need is the right valuation for your company. There are different types of valuation methods, and this blog will explore whether an asset-based approach is the right one for you.

The asset-based approach focuses on a company’s net asset value, or the difference between a company’s assets and its liabilities once they have been calculated at the end of each business day. You identify the net asset value by subtracting total liabilities (something the company owes) from total assets.

There are other key components to consider. The asset-based valuation can also be adjusted so you can calculate a company’s net asset value based on the market value of its assets and liabilities.

Understanding the definition and importance of asset-based valuations, the asset valuation formula, and how it can benefit the sale of your business will give you a clearer understanding of which approach to take.

Understanding Asset Based Valuation

Anyone who wants to sell their business first needs to know how to price it correctly in today’s market. Identifying the value of your company is the crucial first step in the sales process.

However, it’s important to remember that there are a few different ways to identify a company’s value.

Two common ones are equity value (the total value of a company that is attributable to equity investors) and enterprise value (a comprehensive measure of a company’s total value).

An asset-based approach can be used in conjunction with both methods or as a standalone valuation. In other words, if your company doesn’t have equity, the asset-based valuation can be used as an alternative.

In addition to determining the value of your company before you sell it, the asset-based value is often used as part of the final due diligence process that concludes a business sale. The asset-based value is also used often when a company is planning a liquidation.

It’s also important to consider another aspect of this: Tangible vs. Intangible Asset Valuations. Tangible assets are physical items that can be quickly turned into liquid assets (which can be easily converted into cash). Intangible assets are non-monetary assets that are harder to value. That can include your company’s brand reputation or patents.

Another area to consider is the Asset Valuation Formula and Calculations.

Asset Based Valuation Methods

Since an asset-based valuation is used to determine a company’s worth based on the value of its assets, the methods for doing this valuation include:

• Calculating Net Assets by subtracting liabilities from your total assets. 
• Evaluating assets at their fair market value, considered a more accurate representation of the company’s value. 
• Using common valuation techniques such as book value, liquidation value, and replacement costs. 
• The Applicability method, used for companies with significant tangible assets or those in financial distress. 

Another approach is the Asset Accumulation Valuation, which estimates the value of a company by adding up the fair market value of its total assets, both tangible and intangible, and considers all assets and liabilities, including ones not on your balance sheet.

The Excess Earnings Method considers both tangible and intangible assets to determine the value of a business to assess the worth of intangible assets separately from physical assets.

The Adjusted Net Asset Method calculates the net value of a company’s assets by subtracting its liabilities from its total assets, then adjusts this net asset value to reflect factors such as the fair market value of assets or liabilities.

An experienced business broker will have a good sense of how these methods work and whether they are the right valuation method for the business that you want to sell.

Applications of Asset Based Valuations

To apply asset-based valuation methods, start with these three steps.

1. Identify a company’s net assets by subtracting liabilities from assets.
2. Calculate the net asset value based on the market value of assets and liabilities.
3. Explore principles and methods that include book value, liquidation, and replacement cost techniques.

In a Business Sale Context, this approach is significant. If you’re considering selling your company, the asset-based approach can be a beneficial strategy for selling your business.

So, why should you consider the asset-based approach if you’re selling your business? One advantage is that you get a clear and tangible valuation for your business, and prospective buyers can see the assets they will be acquiring. That can help instill confidence in buying your company. It generates transparency and can help to reduce uncertainties that potential buyers might have about the value of your business.

The asset-based approach could also be beneficial if your business has substantial assets but limited cash flow or slowing profits.

This approach can also provide a clear picture of your company’s value when it comes to financing, reporting, and an analysis of your books.

Pros and Cons of Asset-Based Valuation

There are different facets to an asset approach valuation, so understanding how asset-based valuation models work is important before you decide if this is the right valuation method for the business you want to sell.

Speaking to a professional business broker before you launch the sale is well advised. An experienced broker like the ones at Website Closers, and who have sold businesses in your industry, will understand if an asset-based valuation formula is right for your company and will understand the benefits of an asset-based method of valuation.

As with any valuation method, there are Pros and Cons of an Asset-based Valuation. Some of the pros include:

• This valuation method is very useful when a company is either being sold or facing liquidation.
• It’s useful for valuing businesses in the investment segment.
• This method considers assets and liabilities for valuation, but offers flexibility in deciding which assets and liabilities to consider for the valuation, and flexibility on how to measure the value of each

Some of the Cons include:

• This method fails to consider a company’s prospective earnings
• While this sounds like a simple valuation method, in most instances, a high level of experience and accuracy is necessary to get the right valuation.

As with all valuation methods, there are advantages and limitations to an asset valuation formula, and using an asset method valuation won’t be ideal for every business. Talk to your business broker to best understand if a valuation based on assets is right for the company you want to sell.

Conclusion

While there are several methods that can be used to value a business, depending on the nature of the company you want to sell, an asset-based valuation could definitely be the preferred option.

This is particularly true because it applies to cases where a business is taking on challenges related to liquidity issues. But even if your business is not facing liquidity, looking at your assets can be an appealing model for buyers.

The asset-based method is also seen as one that works in numerous niches, although it has its own disadvantages,. This method is complex, and a challenge for business owners with little to no experience.

The experienced brokers at Website Closers have sold more than one billion dollars’ worth of eCommerce businesses, and if you reach out to us today, we can give you a free evaluation of your business and the best valuation methodology to use.

That includes knowing if the asset-based valuation is right for you.

At Website Closers, it’s imperative that our brokers always make the sale, negotiations, and final transaction work properly for both buyer and seller. Once your eCommerce is under contract, you can be certain that we will have the information needed for the closing and ownership transition.

Selling an eCommerce business is the same as selling any other type of business – it gets easier if you have the right talent on your side.