Knowing the true value of your business is one of the most important steps for a business owner when making informed decisions — whether you plan to sell, seek investment, or simply want a clear view of your financial position. Yet, research shows that 98% of business owners don’t know their company’s actual value.
One of the best ways to figure out what your business is really worth is to look at what you own—your assets—and subtract what you owe. That’s exactly what asset-based valuation does. It adds up all your tangible and intangible assets, then takes away your liabilities to give you a clear picture of your business’s value.
To be more specific, if your business is asset-heavy or is going through significant changes, this method will provide you with a clear and accurate picture of the company’s financial condition.
This guide will help business owners understand the basics of asset-based valuation, the various categories of assets it covers, the typical valuation methods applied, and a detailed procedure to guide you through the process of determining your business’s net asset value.
What is Asset-Based Valuation?
Asset-Based Valuation is a method of valuing a business by calculating its net asset value (NAV) — the total of tangible assets (such as real estate, machinery, and inventory) and identifiable intangible resources (such as registered patents or trademarks) minus total liabilities.
This approach focuses on the company’s base of resources rather than its profits or market comparisons, and often involves adjusting the book values of holdings and liabilities to their current fair market values to reflect their true economic worth.
Methods of Asset-Based Valuation
Businesses can apply different techniques under this approach depending on their conditions. Professionals generally use income, market, and asset-based methods for comprehensive analysis in practice. Below, we discuss a few of the important methods of Asset-Based Valuation.
1)Asset Accumulation Method
A standard approach that creates an enhanced balance sheet by valuing each holding and liability at fair market value. It may also include items not usually shown on financial statements, like intellectual property or pending legal obligations. The company’s value is then calculated as
Total Assets – Total Liabilities = Company Value
It is commonly used by resource-heavy businesses that are going through changes or need an accurate assessment of their holdings and liabilities based on current market values.
2)Excess Earnings Method
This established valuation approach estimates a company’s goodwill and other intangible items by first valuing its tangible resources and calculating the normal return expected from them.
It is often used in companies that provide professional services, manufacturing firms, and businesses whose value is mostly intangible.
3)Cost Approach
This technique estimates the value of a holding by determining the current cost required to recreate or replace it with another of equivalent utility. It covers both direct and indirect expenses along with a reasonable profit margin.
This method is apt for holdings like patents, proprietary technology, software, or unique tangible property with no active market — particularly when there is limited market or income information. It provides a tangible, cost‑based floor value, representing the amount required to reconstruct the item.
4)Relief‑from‑Royalty Method
This income‑based method estimates the value of an intangible resource by calculating the present value of royalty payments that would be saved by owning it rather than licensing it from a third party.
It works best for trademarks, brand names, and other licensable intellectual property. It’s most effective when royalty rates and revenue forecasts are reliable, as they show the value of owning the asset by the savings from not paying royalties.
5)Liquidation Approach
The liquidation approach assesses the value of a company’s items as if they were sold quickly under forced or distressed conditions. Since they need to be sold within a short time, these values are usually lower than the market values.
It is suited for businesses facing financial challenges or closure, estimating what creditors or stakeholders could realistically recover if holdings are sold quickly.
6)Going Concern Approach
The going concern approach values a business as an active, operating entity, assuming it will continue functioning into the foreseeable future, and accounts for both its physical and intangible resources.
It is most suitable for companies that are financially viable and expected to sustain long‑term operations, although it can also apply to businesses that are newer or temporarily unprofitable if continued viability is likely.
Overview of Asset-Based Valuation Methods
Here is a simple explanation of various asset-based valuation methods and the cases in which to use them:
| Method | Best For / Suitability | Key Feature |
| Asset Accumulation Method | Asset-heavy or reorganizing companies | Detailed valuation of all holdings and liabilities |
| Excess Earnings Method | Companies with significant goodwill (services, manufacturing) | Focus on intangible asset valuation using excess earnings |
| Cost Approach | Patents, tech, software | Values holdings based on cost to recreate or replace |
| Relief‑from‑Royalty Method | Brands, trademarks, licensable IP | Values intangibles via projected royalty savings |
| Liquidation Approach | Distressed or liquidated firms | Conservative valuation under quick-sale conditions |
| Going Concern Approach | Profitable, ongoing businesses | Includes both tangible and intangible holdings for ongoing operations |
Key Steps in Asset-Based Valuation
Asset-based valuation calculates a company’s worth by following a series of key steps. Let’s see how this works with an example.
Step 1: Identify All Business Assets
You begin by determining the items—tangible ones like land, equipment, and inventory, and intangible ones like patents, trademarks, copyrights, and goodwill.
Let’s say you own a company called Pioneer Tech Solutions. The first step is simply to identify and list all of its assets.
| Asset Type | Assets Included |
| Tangible | Land, Equipment, Inventory |
| Intangible | Patents, Customer Relationships, Goodwill |
Step 2: Assess the Value of Tangible Assets
Once the assets have been identified, the company should evaluate the tangible items’ worth. The company can use either the fair market value (the price that a buyer and seller would agree on) or the book value, which is the historical cost less accumulated depreciation (and impairment), to do this.
Assign values to these physical assets identified above:
| Asset | Valuation Basis | Value (USD) |
| Land | Book Value | $500,000 |
| Equipment | Fair Market Value | $300,000 |
| Inventory | Book Value | $150,000 |
Total Tangible Asset Value = $500,000 + $300,000 + $150,000 = $950,000
Step 3: Evaluate the Value of Intangible Assets
Once you’ve valued the tangible holdings, intangible assets must be assessed. Their potential value can be measured through methods like the cost approach, excess earnings, or the relief-from-royalty approach.
Assess the intangible assets identified earlier using special techniques:
| Asset | Valuation Basis | Value (USD) |
| Patents | Cost Approach | $200,000 |
| Customer Relationships | Excess earnings method | $150,000 |
| Goodwill | relief-from-royalty method | $100,000 |
Total Intangible Asset Value = $200,000 + $150,000 + $100,000 = $450,000
Step 4: Calculate the Total Asset Value
Adding together all tangible and intangible items gives a clear picture of the company’s value before factoring in liabilities.
Now, merge the tangible assets from Step 2 with the intangible assets from Step 3 to find the business’s total asset value.
Total Asset Value = $950,000 + $450,000 = $1,400,000
This is the value of a company’s holdings before any liabilities are subtracted.
Step 5: Arrive at the Net Asset Value (NAV)
The last stage involves determining and valuing all the liabilities—such as bank loans, accounts payable, and bonds issued—and then deducting them from the total asset value. The figure you get is the Net Asset Value (NAV), which shows the company’s worth after considering its debts.
Finally, deduct the company’s liabilities from the total asset value calculated in the previous step:
| Liability Type | Value |
| Bank Loans | $300,000 |
| Accounts Payable | $100,000 |
| Bonds Issued | $200,000 |
Total Liabilities = $300,000 + $100,000 + $200,000 = $600,000
Net Asset Value (NAV) = Total Asset Value − Total Liabilities
= $1,400,000 – $600,000 = $800,000
According to the asset valuation method, Pioneer Tech Solutions’ net worth is estimated to be $800,000.
Pros and Cons of Asset-based Valuation
To evaluate the strengths and limitations of this method in the process of identifying the value of a company, it is necessary to recognize its advantages and disadvantages. Here are the key pros and cons.
| Pros | Cons |
| Basic and clear calculation | Future earning possibilities aren’t taken into account |
| Appropriate for liquidation situations | Hard to determine the worth of intangible and off-balance-sheet |
| Gives a cautious, lowest value estimation | Businesses that have strong growth or intangibles may be significantly undervalued |
| Flexible in choosing and valuing assets and liabilities | Needs in-depth information, considerable experience, and precision. |
FAQs on Asset-Based Valuation
The following are some frequently asked questions related to Asset-Based Valuation.
When is asset-based valuation most appropriate?
It’s best suited for businesses with many tangible items or when a company’s future earnings are unpredictable—often in mergers, acquisitions, or distressed sales.
What is the difference between book value and fair market value?
Book value is the holdings original cost minus depreciation; fair market value is what it could sell for today on the open market.
What types of assets are included?
They include both tangible (physical real estate, equipment, supplies) and intangible items (patents, trademarks, copyrights).
Is asset-based valuation used in mergers and acquisitions?
Yes, it’s commonly relied upon in M&A to determine the worth of each holding and help set transaction terms.
Do liabilities need to be exact in asset-based valuation?
The liability should be estimated fairly, as inaccurate liability estimates can misrepresent your company’s net asset value (NAV), whether by overstating or understating it.
How does asset-based valuation differ from earnings-based methods?
It focuses on the company’s resources, while earnings-based methods value the business based on its ability to generate future profits.
Does depreciation affect asset-based valuation?
Yes. Depreciation reduces the book value of tangible items on financial statements, which affects the calculated value—unless fair market values are used instead.
How does valuation differ between going concern and liquidation scenarios?
Going concern is based on the notion that the business will not be closing down and, therefore, holdings are held in higher value. Liquidation values items at a lesser price, which suggests a speedy sale at a price possibly less than market value.
Accurately Value Your Business with Asset-Based Valuation
Knowing the real value of your business is definitely about having a clear insight into its assets—both tangible and intangible. This method provides a simple and trustworthy approach to finding this value, particularly for businesses that have many assets or those that have undergone considerable changes.
To facilitate this process, Cheqly has collaborated with Eqvista to offer certified valuation services such as 409A valuations, along with audit-ready reports to help business owners. Moreover, this partnership, combined with Cheqly’s business financial tools, enables you to manage equity, issue stock options compliantly, and make all the business decisions you need—from one place. Contact us to learn more!