Net assets based valuation - for the valuation of loss making companies
Application cases
- This method is applied in divestments, in carve-outs, spin-offs, and similar cases when the company or division to be sold is loss-making. The method is also applied in case of non-profit organizations.
- Asset-based valuations are also used to set the low end of a valuation range: If the asset based value is higher than the DCF value, then the asset based value is normally taken into account for a negotiation.
Advantages
- Simple method, easy to calculate
- Easy to understand, even for non experts
- Limited possibilities for manipulations
Disadvantages
- No consideration of the development of earnings, of synergies or future opportunities
- Purely history based method
- No consideration of sunk investments, FX is rarely taken into account
- As assets should be valued according to current market values, those values are sometimes hard to be determined
Calculation
Replacement value of operating net assets
+ liquidation value of non operating net assets
– liabilities of going concern = Net asset value
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