What Does Tangible Asset Value (TAV) Mean?
Tangible assets are, literally speaking, assets which have a physical existence (i.e. it can be touched and seen). It includes property plant and machinery (PPE). This is further modified to include all assets where revenue generation is certain. For example, treasury bills, commercial paper, receiveables, etc.
If an entity liquidated all its assets at fair market value and went out of business, then the amount of money that would be available for payout to investors is the tangible asset value of the entity.
Divestopedia Explains Tangible Asset Value (TAV)
A company's valuation is influenced by its underlying tangible assets value. An entity which has a greater proportion of tangible assets in its balance sheet is safer for investors as compared to one where the proportion of tangible assets is lower as it minimizes the loss potential.
Say, for example, that two companies generate free cash flows of $5 million each. Company A has $15 million in tangible asset value, 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 of the investment in Company A is perceived to be lower because under the worst case scenario of bankruptcy, there are more assets that can be liquidated.
The level of tangible assets in your business might create a valuation ceiling that a buyer is willing to pay. When preparing to sell your business, you should consider how to build your asset base, if possible. If you are in an industry that is not capital intensive, find ways to support the valuation of your goodwill.