Some trading companies hold assets with a considerable value, such as property developers and farming companies. The minimum value for such companies is likely to be the sum of the assets that they hold. It may be appropriate to add to that minimum value a further sum representing goodwill.
When should I use the asset basis?
Asset-based approaches should be considered where either the business is loss-making, is making a very poor return on assets or is in a break up situation.
If the company is loss-making but can still be considered a going concern, the valuation should adjust any material assets to reflect current market value. A discount to the net asset value may be appropriate to reflect the likelihood of losses in the future.
If the company is only making small profits compared with the net asset value, and the application of a P/E ratio or other multiple will produce a value less than the adjusted net asset value, then the valuation would normally be based on the net assets. No further discount would normally be required to reflect future losses.
If the company is in a break up or other distress situation it would normally be assumed that creditors need to be paid in full, but assets would be reduced in value to reflect the fact that the company is in distress.
In some cases it will be necessary to engage a valuer to value material assets such as property, plant and machinery, intangible assets, growing crops and livestock.
Contingent tax liabilities may need to be brought into the valuations. The following issues need to be considered in deciding how much of the contingent tax charge should be deducted:
- When an entire property company is being sold, the vendor and purchaser often begin negotiations on the basis of a 50:50 split of the contingent tax between themselves.
- When the company owns many properties and is regularly engaged in disposal and replacement of properties, then a large percentage may be appropriate.
- If the company owns a single commercial property and has no history whatsoever of property disposals, then it might be that only a very small proportion of the contingent tax would be deductible.
- When negotiating valuations with HM Revenue & Customs, an allowance in the range of 10% to 30% is frequently appropriate.
Discount factors need to be considered when the interest is less than 100%. When valuing an interest in a private company that is less than a 100% interest, it may be appropriate for that interest to be discounted from the full pro rata value.
The level of the discount will depend on various factors, including the size of the interest, the spread of other interests, the degree to which the shareholding is locked in and the pattern of dividend payments, both historic and going forward. The following range of discounts are often reasonable: