Asset valuation is the process of determining the current value of a company's assets, such as stocks, buildings, equipment, brands, goodwill, etc. This process often happens as part of the wider business valuation, or before you buy, sell or insure an asset.
Asset-based valuation allows you to calculate a business's net worth by adding up the current value of its assets less the value of its liabilities.
How to value business assets?
The first step in asset valuation is to have a clear understanding of the different types of business assets that you own. Look at your resources and create an inventory detailing all your:
- current assets
- fixed assets
- intangible assets, including intellectual property (IP)
How to calculate the value of tangible assets?
The starting point for determining the value of tangible assets is the net book value (NBV), which is the value of the assets stated in the accounts. This method suits mainly stable businesses with significant tangible assets.
When valuing tangible assets, you can adjust the NBV figures to take into account economic realities such as:
- property or other fixed assets which have changed in value
- old assets or stock which would have to be sold at a discount
- bad debts to the business
The value of many kinds of tangible assets - like machinery and equipment - often depreciates over time due to wear and tear. You will need to consider this when valuing such assets. See more on depreciation of assets.
Besides age and usage, many other factors can affect the value of assets. One example is bankruptcy, where asset liquidation value will typically be lower than its fair market value.
How to calculate the value of intangible assets?
Intangible assets often give businesses their competitive advantage. However, because they have no physical characteristics, their value can be hard to determine.
A common way of valuing intangible assets, including IP but excluding goodwill, is by using either:
- market approach - based on market evidence of what third parties have paid for comparable intangible assets (in practice, this method can be difficult to apply)
- income approach - assumes that the value of an asset is the present value of future earnings from the asset
- cost approach - based on estimating the costs of constructing or acquiring a new intangible asset that is of more or less the same use as the existing one
These methods look at things like comparable transactions, excess earnings, relief from royalty, replacement or reproduction costs and simulation analysis.
You can generally determine the value of goodwill based on the calculation of a residual value, by subtracting the net value of assets from the value of equity of the business.
Unlike tangible assets, which depreciate over time, intangible assets (and intellectual property in particular) often increase in value with time. However, accountancy rules don't allow for such an increase in value to be included in the balance sheet. You should consider seeking professional advice or consult an accountant when valuing intangible assets.
Find out more about valuing your intellectual property.