What Does Asset-based Approach Mean?
The asset-based approach uses the current value of a company’s tangible net assets as the key determinant of fair market value. This approach is typically used where a business is not a going concern, or where a business is a going concern, but its value is tied directly to the liquidation value of its underlying tangible assets and investments. The asset-based approach also provides a useful reasonableness check when reviewing the value conclusions derived under the income or market approaches.
Divestopedia Explains Asset-based Approach
Even when the asset-based approach is not used as the primary valuation method, the conclusion reached under this analysis is important because the overall value of the business may be influenced by the underlying net tangible assets. Say, for example, that two companies generate free cash flows of $5 million each. Company A has $15 million in net tangible assets, compared to only $5 million for Company B. A buyer may be willing to pay more for Company A for two reasons: Company A has more available security to finance the acquisition; and the risk in Company A is perceived to be lower because under the worst-case scenario of bankruptcy, there are more assets that can be liquidated.