Asset-Based Valuation

April 13, 2006

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At a minimum, your company should be valued at the sum of the value of its easily salable parts. Two commonly used business valuation methods look primarily at the value of your hard assets.

Book value is the number shown as "owner's equity" on your balance sheet. This is not a very useful number, since the balance sheet reflects historical costs and depreciation of assets rather than their current market value. However, if you adjust the book value in the process of recasting your financials, the current adjusted book value can be used as a "bare minimum" price for your business.
Liquidation value is the amount that would be left over if you had to sell your business quickly, without taking the time to get the full market value, and then used the proceeds to pay off all debts. There's little point in going through all the trouble of negotiating a sale of your business if you end up selling for liquidation value — it would be easier to simply go out of business, and save yourself the time, broker's commission, attorney's fees, and other costs involved in selling a going concern. Thus, liquidation value is not even considered a valid floor for the price of your business (and you can use this argument in negotiations if you get an offer that approaches liquidation value).