Net Assets Valuation Method
Net assets are the assets attributable to equity shareholders after repayment of short term and long-term liabilities.
Net asset based valuation gives the minimum value (floor value) below which owners will not be willing to sell their investment. It gives the value of the business, which shareholders can realise by selling the assets of business on individual or collective basis.
Benefits of Net Assets Valuation Method
Net assets based valuation can be used when business has to be sold on break up basis or Net realisable value (NRV) basis.
Net assets based valuation is easy to calculate. It can form reasonable basis for subsequent negotiation.
Net assets based valuation method can be used by risk averse organization, as it gives the minimum value which can be realised by selling net assets of the acquired organization in the event of subsequent failure of investment.
Limitations of Net Assets Valuation Method
Net assets based valuation is not suitable for valuing business on going concern basis as it ignores the values of goodwill and development expenditure.
Net asset based valuation is not suitable for valuing knowledge intensive business such as schools, hospitals, software companies etc, even on NRV basis as it ignores goodwill which can have substantial value in knowledge intensive businesses.
Financial statements may carry assets values on historical cost basis which may be very low to determine the current worth of the assets and so business. Inflation gives rise to market value of the assets. Carrying value of the asset may be significantly lower than current market values. In that case, net asset based valuation will understate the value of business.
