Definition of the adjusted net assets method

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What is the adjusted net assets method?

The adjusted net assets method is a business valuation technique that changes the reported values ​​of a business’s assets and liabilities to better reflect its estimated current fair market value. By adjusting asset or liability values ​​up or down, the net effect provides values ​​that can be used in going concern valuations or run-off scenarios. This method can also be referred to as the asset accumulation method.

Key points to remember

  • The adjusted net assets method, also known as the asset accumulation method, is a business valuation that adjusts assets and liabilities to reflect fair market value.
  • This valuation method can be used in run-off scenarios or going concern valuations.
  • The adjusted net assets method focuses on assets and liabilities, while other valuation methods, such as discounting dividends, are based on income.
  • The adjusted net assets method includes off-balance sheet assets and unrecorded liabilities such as leases.
  • Adjusted book value is the difference between the total fair market value of the adjusted assets and the total fair market value of the adjusted liabilities.

How the adjusted net assets method works

In some cases, it can be difficult to establish an accurate business valuation using market or income-based approaches. These methods are common in dividend discount, capitalization, and cash flow models. The alternative method focuses on the assets and liabilities of a business enterprise.

The adjusted net assets method would include both tangible and intangible assets during the adjustment process. Also included are off-balance sheet assets (OBS) and unrecorded liabilities, such as leases or other significant commitments. The difference between the total fair market value of the adjusted assets and the total fair market value of the adjusted liabilities is the “adjusted book value” (what the business is considered to be value).

According to Sean Saari, CPA / ABV, of the accounting firm Skoda Minotti, taking into account the adjusted net assets method is generally the most appropriate when:

  • Promote a holding company or a capital intensive company;
  • The losses are continuously generated by the company; Where
  • Valuation methodologies based on a company’s net income or cash flow levels indicate a value that is less than its adjusted net asset value.

“It should be borne in mind that when income or market-based valuation approaches indicate higher values ​​than the adjusted net assets method, they are generally rejected to achieve the firm’s concluded value.” Saari wrote. “This is because income and market based valuation approaches provide a much more accurate reflection of any goodwill or intangible value the business may have. ”

Special considerations

The adjusted net assets method is the most common asset-based approach. However, income and market-based approaches tend to provide a more accurate representation of goodwill and intangible value.

Adjustments to the net assets method may include adjusting capital assets to reflect fair value, adding unrecorded liabilities (i.e. judgments) and reducing accounts receivable to reflect account of bad balances.

Again, the adjusted net assets method can be used for various valuations, such as run-offs. This method can also be useful for valuing holding companies or those operating in capital intensive sectors. Other cases where the adjusted net assets method is useful are when valuations based on income or cash flows are less than adjusted net asset value.


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