Mergers & Acquisitions:

Business Valuation

Pricing and Buying a Small Business

Balance Sheet Methods of Business Valuation

By Meir Liraz, CEO, BizMove. Used by permission.

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.

 

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