Is a Net Asset Valuation ever enough? 

February 20, 2024

Net Asset Valuations are deceptively easy but there lies the rub

Is a Net Asset Valuation ever enough?  ….Sometimes.

Was I to incorporate a newco with £2 of share capital, it would be worth £2….  but if that same company has been incorporated by two founders who have been plotting a new business and plan to transfer lots of IP on day 2 it would be naïve not to at least think about what intangible value is being transferred and how that should be valued.   Especially in Silicon Valley you see extraordinary valuations for start-ups.  It’s the intangibles that do it!  And of course the intangibles also includes the future prospects for the business.

For companies solely owning one or more properties and with current RICs valuations, a net asset valuation is definitely the place to start, but don’t forget to make an allowance for the costs of running the business and for a notional CGT charge should the properties be sold.

What about a more vanilla trading company?

It’s important not to dismiss a net asset valuation out of hand.  Provided the net assets are correctly valued it sets a base line for a valuation of a company and its shares.  This is effectively the liquidation value of the business, so not a bad starting point. There are wrinkles (always look at the fixed assets and stock as a starter for one to see if they are valued fairly).  Sometimes companies are slow to write off obsolete stock until the time is right. Debtors also need a slide rule passed over them for the same reason.

Directors’ and shareholders’ loans need to be considered.  Are they really equity disguised as debt?

And don’t forget about those knotty intangibles…..

However, a net asset valuation is unlikely to be enough for a trading company valuation.  We undertake multiples-based valuations and DCFs to get a picture that captures the intangibles too.

Even for a vanilla start-up which has high growth intent, it’s wise to undertake a balanced scorecard valuation so the intangibles can be captured.

The nice thing about comparing a net asset valuation with a valuation produced by another methodology is that it gives a prima facie demonstration of the intangible value in a company.

Quite simply:

Multiples based valuation result – Net asset valuation result = intangible value.

You can try this for yourself.  Look at a client’s balance sheet to get the net asset valuation.  Then take the turnover and multiply it by say 1.5x.

Take the revenue multiple valuation, subtract the net asset valuation and there you go.

You will get a result which might be a few £100,000s or millions depending on the size of the business.

To make sense of the number have a think about what it could comprise.  Is it the IP, the people or something else?    Imagine a large services business where the primary asset is the staff.  Does the number for the intangible correlate e.g. to the wages bill or the premium that can be charged for the services provided because of the brand?

Do call us if you want us to walk you through an exercise!

We are around all the time to help with valuations and questions.  Call me on 07736 676 212 or email me at modwenna.rees-mogg@athlacapitalmanagement.com and I can set up a Teams at a time to suit you.