Asset-Based Approach

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Definition: Asset-Based Approach

Asset-Based Approach is one of the three major methods to estimate the value of a business. The value of a business is the cost of recreating the whole business from scratch. The Asset Based Approach values a business as the sum of its parts.

There are 2 asset based valuation methods:

  • Asset Accumulation Valuation Method – The business worth is estimated as the total value of its net assets minus liabilities as obtained from the balance sheet. Difficulty arises in the estimation of the value of intangible assets like patents and trademarks and contingent liabilities like environmental compliance costs, pending legal judgments etc
  • Excess Earnings Valuation Method – This method is used in professional business appraisals like service companies where the value of business goodwill has to be established.

Since it is not possible to place an exact value on intangible assets like goodwill, the asset based approach often yields results which are lesser than the fair market values.

Hence, this concludes the definition of Asset-Based Approach along with its overview.

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