20 Apr Assemblage of Assets: Understanding When Asset Values Drive Business Valuation

Written by: JoAnna DiCicco, CVA

(3-4 minute read)

Per the Uniform Standards of Professional Appraisal Practice (USPAP), an appraiser must consider three different approaches to value: income approach, market approach, and an asset approach. When valuing small businesses, most appraisals will disqualify the asset approach as the value of a business is typically derived from the cash flow (which is represented by the market and income approaches), while the asset approach reflects the floor value of a business. It should be noted that if weight is applied to the asset approach, it must be 100% weight for reasons discussed throughout this newsletter.

However, an asset approach is often appropriate for companies with substantial levels of fixed assets, such as manufacturing firms, construction companies, or logistics/transportation businesses. Additionally, it is utilized when earnings do not support a valuation in excess of the cost of the assets in place. Specifically, within the asset approach, the assemblage of assets method reflects that although the business may not be generating positive or significant earnings, the assets held by the Company retain value and are worth more together and in use than if they were to be sold separately or liquidated. Assemblage of assets value reflects the net book value of assets less liabilities as reported on the balance sheet utilized within the report. The appraiser will still analyze the market and income approaches within the valuation report; however, weight will not be applied to these approaches as the assets in place are worth more than the cash flow of the business.

A stable business with positive cash flow will typically be valued on the going concern premise of value. Going concern reflects the value of a business assuming it were to continue operating as-is. However, in the situations discussed below, the company’s existing earnings stream is not high enough to support a business valuation in excess of its net asset value, and therefore going concern value is not applicable.

As an example, consider a manufacturing business that is currently underperforming, and the cash flow is negative. Furthermore, this same business has approximately $400,000 (net) in operating fixed assets on the balance sheet. Because the company’s current operations reflect a negative cash flow, the assets owned by the company in place are worth more than if the business were to continue operating as-is. Therefore, this company would be valued on the assemblage of assets premise of value at $400,000.

Alternatively, a stable business with positive cash flow (as seen in Scenario 2) can typically be valued on the going concern premise of value. If this business were to continue operating as-is, the current earnings stream would support a valuation that is higher than its net asset value.

* Assumes asset value of business (only fixed assets and goodwill included)

** (based on 3x earnings multiple)

As a second example, consider a trucking business such as FedEx routes where the company owns twelve vehicles. Due to economic pressure and rising fuel costs paired with poor management, margins have diminished, and the Company is only generating a minimal level of earnings. Although the company is not currently performing well, the vehicles can still be utilized and may be able to generate more significant earnings in place under different circumstances. Going concern in this case would undervalue the company due to the value associated with the fixed assets.

The assets and liabilities included in the final value must reflect the structure of assets and liabilities to be included in the proposed transaction so that the assemblage of assets value is accurate. The assemblage of assets value solely reflects the value of tangible assets and does not account for intangible assets (goodwill). This is because goodwill is associated with the going concern of the business and is accounted for within the cash flow multiples. If the business cannot generate enough cash flow to be valued as a going concern, and an asset approach is utilized, then no value will be allocated to the goodwill of the business. For more information on the impact of intangible assets on loan structure, please refer to our article: https://reliantvalue.com/impact-intangible-assets-loan-structure/.