Last time we explored why businesses get valued. Now let's dive into our first valuation method: the asset-based approach.

This approach asks a simple question: what are all the company's assets worth, minus what it owes? It's like calculating your personal net worth.

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Which personal finance concept does this approach mirror?

The most basic asset-based method uses book value. Book value takes what's recorded on the company's balance sheet - assets minus liabilities.

If ABC Company has $500,000 in assets and $200,000 in debts, its book value is $300,000.

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Can you see why this might be called the "accounting" approach?

However, book values on financial statements often don't reflect current market reality. A building bought 20 years ago shows its original cost, not today's market value.

That's where adjusted book value comes in - we update asset values to current market prices.

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Why might a 20-year-old building be worth more than its original cost?

Here's how adjusted book value works: take the balance sheet, then research current market values for each major asset.

Real estate gets appraised, equipment gets valued at replacement cost, and inventory gets marked to current selling prices.

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Which assets do you think are hardest to revalue accurately?

The asset-based approach works best for companies with lots of tangible assets. Manufacturing companies with factories, real estate firms with properties, or retail chains with inventory.

These businesses have valuable "stuff" you can see and touch.

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What type of business comes to mind that has lots of physical assets?

But here's the limitation: this approach struggles with modern service businesses. How do you value Google's search algorithm? Or a consulting firm's client relationships?

Asset-based methods miss the intangible value that drives most businesses today.

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Can you think of valuable business assets that don't appear on balance sheets?

Type

Fill In The Blanks

Markdown With Blanks

Let's practice calculating book value. Complete this simple example:

ABC Manufacturing Balance Sheet

• Total Assets: $800,000
• Total Liabilities: $300,000
• Book Value: [[blank:$500,000]]

If the factory was appraised at $200,000 above book value, the adjusted book value would be [[blank:$700,000]].

Suggested Answers

• $500,000
• $700,000
• $600,000
• $400,000