LOS j: Demonstrate the asset-backed approach to private company valuation.

The asset-based approach is generally not used for going concerns. Because it is easier to find comparable data at the firm level compared to the asset level, the income and market approaches would be preferred to value going concerns.

Because it is difficult to find data for individual intangible assets and specialized assets, the asset-based approach can be difficult to apply. It generally results in the lowest valuation because the use of a firm’s assets in combination usually results in greater value creation than each of its parts individually.

The asset-based approach values firm equity as the fair value of its assets minus the fair value of its liabilities.

If a firm has minimal profits and little hope for better prospects; it might be valued more highly for its liquidation value than as a going concern if another firm can put the assets to better use. Because the asset-based approach values firm equity as the fair value of its assets minus the fair value of its liabilities, it would capture this liquidation value.

Pharmaceutical and biotech firms have a high degree of intangible assets. In these cases, the going concern value is likely to be higher than the value from the asset-based approach.