Net Asset Valuation Basis

Net Assets Based Valuation (often referred to as asset-based

valuation or net book value) is an approach to valuing a business
based on the value of its net assets. This method involves taking
the total assets of a company and subtracting its total liabilities.
The resulting figure represents the net assets or equity of the
company.

Key Adjustments:

1. Revaluation of assets: Assets on the balance sheet might be

recorded at historical cost. For a more accurate valuation,
they should be adjusted to their current market values.

2. Intangibles having no fair value: On balance sheet

intangibles which does not have a stand alone market price
should not be considered in valuation.

3. Identifying and valuing intangible assets: Not all assets like

goodwill, patents, or trademarks might be reflected on the
balance sheet. These need to be identified and valued.

4. Contingent liabilities: Adjust for any potential liabilities not

on the balance sheet, such as pending lawsuits.

5. Obsolete inventory: Reduce the value of any inventory that

might be obsolete or slow-moving.

6. Bad debts: Adjust for any accounts receivable that might be

uncollectable.

7. Tax liabilities: Ensure that all deferred and potential tax

liabilities are accounted for.

8. Deferred Tax Asset: Ignore it in the calculation of net assets

value since its realization is subject to future profitability.
Advantages:

1. Simplicity: It's a straightforward method, especially when

compared to other valuation methods like discounted cash
flow or earnings multiples.
2. Tangible basis: It provides a concrete value based on tangible
assets.
3. Clear starting point: For businesses in distress or liquidation
scenarios, this method can give a clear baseline for what the
assets might be worth if the company were to be dissolved.

Disadvantages:

1. Ignores earning power: It doesn't consider the earning

capacity of a business, which is often more important than
just its assets.
2. Not suitable for all businesses: For service-based or
technology companies with few tangible assets but strong
cash flows, this valuation method might significantly
undervalue the business.
3. Market value discrepancies: The book value of assets on the
balance sheet may not reflect the current market value,
leading to potential inaccuracies.
4. Ignores intangibles: Intangible assets like brand reputation,
customer loyalty, and skilled workforce are not always
reflected on the balance sheet but can significantly contribute
to a company's value.

In conclusion, while the Net Assets Based Valuation method can be

useful in specific contexts (like liquidation scenarios or for firms
with significant tangible assets), it often doesn't capture the entire
picture of a company's worth. It's essential to consider the nature of
the business and its assets and to perhaps complement this method
with other valuation techniques.