Valuing business assets – are book values too high or too low?

Figuring out the actual values of business assets is a common task in business appraisals. Pick up the property records in a typical company, and you are looking at the book values. Sounds easy, right?

Welcome to the real world. The fact is that business assets can and do disappear, while being on the books. On the other hand, some valuable assets can be in use while not on the books at all.

Don’t expect that this difference comes out in the wash. Your accountant may want to offset such imbalances, but two wrongs don’t make it right. How do business assets wind up on the company’s books? Usually, your accountant keeps records of business assets using their original cost of purchase less depreciation.

What this book value does not represent is the true fair market value (FMV) of the asset. To make matters even more interesting, the fair market value can be estimated on the premise of the asset in use or in exchange. The first assumption is that the asset will continue being used in business operations. The second is that the asset will be offered for sale. The value may differ by quite a bit.

The key point is that the price you paid for a piece of equipment or software application years ago may bear no resemblance to what the asset is worth today. Technological obsolescence has really changed the game in asset valuation. Just because a custom software cost you, say, $100,000 in 2000 does not mean its value is anywhere near that today.

Purchase price allocation calls for business asset valuation

Even so, there are examples in business appraisals when current fair market values of some business assets are close to their book values. This is more likely to be the case if you are valuing the entire company and the assets are expected to be in use. If the business is offered for sale, purchase price allocation across the assets is one scenario when accurate asset valuation is needed.

Market value of business assets – another perspective

If the company plans to divest of some of its assets, you may find that the market place has a very different idea of what these assets are worth. This comes up when business assets are viewed as a collateral against a bank loan. Your lender is not interested in using the assets. Instead, the likely selling price in the event your company defaults is important.

Liquidation value – when assets are sold at an auction

The appraisers call this the liquidation value. It is established at an auction attended by the equipment brokers or other companies looking to get usable assets at a discount. You can bet on the selling prices being lower than the book value in these situations.

See Valuation Tour