Asset
Based Valuation
Asset
based Valuation is takes into account the asset & liabilities of the
business. There is different method of asset based valuation i.e.
Asset
Valuation Bases
1. Historical Cost
Asset may be valued or
measured at book value or historical cost. This method is very easy and
convenient and supported by evidence (books of accounts).
2. Net Realizable Value
Asset
may be valued at net realizable value (price would be received in market). This
method requires a lot of valuation work and expertise. This method is more
representative of market value of business.
3. Replacement Cost
Assets
are valued at replacement cost. it means how much it would cost business to
replace the existing assets. This is an effective way to determine the offer
price for business. This is minimum cost buyer has to occur, if he interested
in the business.
Asset
based Valuation Limitations
1. Future Cash flow ignored
First
limitation of asset based valuation is its ignorance of future cash flows. it
is important to mention that cash flow are very important aspect for business
valuation, because no one would be interested in a business , which has no
capacity to generate cash flows.
2. Intangible Assets
Second
limitations of asset based valuation are its ignorance of intangible asset. It
means intangible asset are not taking into account.
3. Bases of Valuation
There
are different bases of valuation available i.e. historical cost, NRV,
replacement cost. it is very difficult to decided that what bases is to be used
for valuation of asset, because every bases has its own advantages and
limitations.
Asset
Based Valuation Advantages
1.
Solid
Bases
Asset
based valuation is based on the solid bases i.e. assets. Management has
confidence that they are relying on something has existence, and not on future
predication.
2. Minimum
Price Determination
Asset
based valuation is an effective way to determine the minimum price of business.
The asset market price or replacement cost can easily be used to determine the
minimum price of a business.
3. Liquidation
& Cash Flows
Asset
based valuation also put light on the possible future cash flows from the asset
in case of liquidation.
