Asset Approach

The Net Asset Approach Valuation method assumes that the value of a business will be realized by the hypothetical sale of its net assets as part of a going concern. This approach will take a company’s pro forma balance sheet at the time of closing and add in two additional components. The first will estimate its appraisal surplus on property and equipment. The second will estimate the value of the goodwill in the company.

The strength of this method is its simplicity in that it resembles a balance sheet. Many potential buyers are familiar with the layout of a balance sheet, making it easy to identify the key aspects of the value of a business.

The weakness with this method is that these valuations are estimates only. The estimate of intangible assets, such as goodwill, is difficult. There may be other intangible assets which do not show up in this approach but may be captured in the cash flows of the income approaches. This approach is not ideal when the assets cannot be valued with accuracy.