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What is an asset-based approach?

Asset-based approach

It's a way of determining the value of a business. It's calculated by subtracting a company's total liabilities from its net asset value (NAV), or the fair market value of the company's total assets. It's often used to evaluate a business that is preparing for liquidation.

Where have you heard about asset-based approaches?

It should not be confused with the asset-based approach that is sometimes referred to in community development, which looks at the assets in a community – for example, skills, talent, knowledge and connections - and how they can be mobilised to achieve sustainable development.

What you need to know about asset-based approaches...

The first challenge when using the asset-based approach is deciding which assets and liabilities to include in the calculation. The second is deciding how to measure their value. For example, a company's balance sheet may not include products that were developed internally rather than bought. If that internal product is also unique to that company it may have an intangible value that is difficult to determine.

The asset-based approach is normally used to assess the value of businesses that are no longer operating or running at a loss to see what it would cost to recreate them. Alternatively, for businesses that are based on assets and not on income, the adjusted asset-based approach bases the valuation of the assets on their current market value rather than the historical costs.

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