A widely used asset-based small business valuation method that determines the business value as the difference between the current value of all business assets and the current value of all its liabilities.
What It Means
While the Asset Accumulation Method uses the familiar balance sheet format, the business value result is very different from the cost-basis historic company “book value”. Fair market value of all business assets, both tangible and intangible is determined.
Next, both recorded and contingent business liabilities are valued using the fair market value standard. The difference between the sum total of the asset value and liability value thus determined establishes the value of the business.
Some off-balance sheet assets that are included in the Asset Accumulation valuation are:
- Intellectual property items, such as internally developed products and services.
- Key distribution and customer contracts.
- Strategic partnership agreements.
Typical unrecorded liabilities that are included in the valuation are:
- Pending legal judgments.
- Property and income tax obligations.
- Environmental compliance costs.
Asset Accumulation Method is very useful when allocating the purchase price among the individual business assets, as part of the asset purchase agreement. However, proper application of the method requires considerable expertise in asset and liability valuation.