In the previous post, we discussed the prevailing business valuation standards and introduced the three basic valuation approaches: the asset approach, the market approach, and the income approach.
In this post, we turn our attention to the Asset Approach.
Valuation Methods Under the Asset Approach
The asset approach (and cost approach for intangible assets) is discussed in paragraphs 34-35 of SSVS-1 (p. 18). The statement makes it clear that the guidance applies to the valuation of a business, business ownership interest, security or intangible asset.
Guidance for the asset approach in the Business Valuation Standards of the American Society of Appraisers (ASABVS) is found in BVS-III Asset-Based Approach to Business Valuation (ASABVS, p. 9). This guidance also is clear in that it applies to the valuation of a business, business ownership interest, security or intangible asset. However, it does state the following: “Valuations of particular interests in an enterprise may or may not require the use of the asset-based approach.” (ASABVS, p. 9).
The standards suggest consideration of all three approaches when developing marketability discounts, including the asset approach. I am not aware of any traditional method for determining marketability discounts that fall under the asset approach. Nevertheless, the guidance of PG-2 suggests that we think about the applicability of the asset approach when valuing minority interests.
Our next post will discuss valuation methods under the market approach.