In Valuations, Businesses are Not Like Homes.

Liquidated, Book, & Adjusted Book Value Methods.

Market approaches are similar in concept to the Competitive Market Analysis (CMA) that is provided by your real estate agent when you sell your home. The real estate industry has done an accurate job of tracking the sale of homes, their price, location, size, and the details of each home. Having this information, a CMA is accurate and meaningful in the marketing of your home. Unfortunately, this is not the case with businesses. Efforts have been made to try and track the sale of businesses to replicate the real estate industry’s success but to no avail. The sale of a business is a private transaction and the information is just not available.

There are three primary asset approach methods. The liquidated value method, the book value method, and the adjusted book value method.

The liquidated value method is used only for business in distress. This method estimates the liquidated value of the assets on a “forced sale” bases where the values are less than the fair market value of the assets and subtracts the liabilities. This method is not appropriate for a successful practice due to the risk of understating it value as a going concern.

The book value method is calculated by subtracting your practice’s total liabilities from its total assets as listed on the balance sheet. The value of the assets may have been reduced faster than the true economic loss of their fair market value. Therefore, the book value of a business is not used because it does not consider the income-producing ability of the assets to produce a fair market value of the practice as a going concern.

The adjusted book value method adjusts the book value of your practice’s assets to their estimated fair market values and subtracts the liabilities. If the adjusted book value is worth more than the fair market value of the practice, it would be better to sell the assets outright, not the practice as a going concern. Therefore, your practice is never worth less than its adjusted book value. This method is usually rejected because its adjusted book value is not an indicator of the income-producing ability of the assemblage of all of the assets.