This approach calls for the assets of the business to be valued. It is most
often used when the business being valued generates earnings primarily from
its assets rather than the contributions of its employees or when the cost
of starting a business and getting revenues past the break-even point
doesn't greatly exceed the value of the business's assets.
There are a number of
balance sheet methods of valuation including book
value, adjusted book value, and liquidation value. Each has its proper
application. The most useful balance sheet method is the adjusted book value
method. This method calls for the adjustment of each asset's book value to
equal the cost of replacing that asset in its current condition. The total
of the adjusted asset values is then offset against the sum of the
liabilities to arrive at the adjusted book value.
Adjustments are frequently made to the book values of the following items:
Accounts Receivable – often adjusted down to reflect the lack of
collectability of some receivables.
Inventory – usually adjusted down since it may be difficult to sell off all
of the inventory at cost.
Real Estate - frequently adjusted up since it has often appreciated in value
since it was placed in service.
Furniture, Fixtures, and Equipment – adjusted up if those items in service
(probably more than a few years) have been depreciated below their market
value, or adjusted down if the items have become obsolete.