Adjusted Net Asset Method: Fair Market Valuation Explained

What Is the Adjusted Net Asset Method?

The adjusted net asset method is a business valuation technique that changes the stated values of a company’s assets and liabilities to reflect its estimated current fair market values better. By adjusting asset or liability values up or down, the net effect offers values that can be used in going-concern assessments or liquidation scenarios. It includes off-balance sheet assets and unrecorded liabilities.

This method may also be called the asset accumulation method. It differs from other valuation methods, such as dividend discount, that are income-based and can be less accurate.

Understanding the Mechanics of the Adjusted Net Asset Method

In certain cases, it may be difficult to assemble an accurate business valuation using market or income-based approaches. These methods are common in dividend discount, capitalization, and cash flow models. The alternative method focuses on assets and liabilities of a business enterprise. 

The adjusted net asset method would include tangible and intangible assets during the adjustment process. Also included are off-balance sheet (OBS) assets and unrecorded liabilities, such as leases or other notable commitments. The difference between the total fair market value of the adjusted assets and the total fair market value of the adjusted liabilities is the “adjusted book value” (what the business is considered to be worth).

According to Sean Saari, CPA/ABV, of the accounting firm Skoda Minotti, consideration of the adjusted net asset method is typically most appropriate when:

• Valuing a holding company or a capital-intensive company;
• Losses are continually generated by the business; or
• Valuation methodologies based on a company’s net income or cash flow levels indicate a value lower than its adjusted net asset value.

“One needs to keep in mind that when income or market-based valuation approaches indicate values higher than the Adjusted Net Asset Method, it is typically dismissed in reaching the concluded value of the company,” Saari wrote. “This is because income and market-based valuation approaches provide a much more accurate reflection of any goodwill or intangible value that the company may have.”

Important Considerations for Using the Adjusted Net Asset Method

The adjusted net asset method is the most common asset-based approach. However, income- and market-based approaches tend to provide a more accurate representation of goodwill and intangible value. 

Adjustments made to the net asset method can include adjusting fixed assets to reflect fair value, adding in unrecorded liabilities (i.e. judgments), and reducing accounts receivable to account for uncollectable balances. 

Again, the adjusted net asset method can be used for various valuations, such as liquidations. This method may also be useful when valuing holding companies or those operating in capital-intensive industries. Other such cases when the adjusted net asset method is useful is when valuations based on income or cash flow are lower than the adjusted net asset value.

The Bottom Line

The adjusted net asset method is a valuation technique that adjusts a company’s assets and liabilities to their fair market values. This method is particularly useful for valuing holding companies, capital-intensive businesses, or when other valuation methods indicate lower values. The adjusted net asset method includes intangible assets and off-balance-sheet items, providing a comprehensive valuation approach.

This method may be less suitable in some situations, however, such as when income or market-based approaches offer a higher valuation, reflecting goodwill or intangible assets.