Why is the net asset value needed in a business valuation?

Usually, capitalised earnings value methods are used when valuing a company (for example for sale). However, the net asset value offers exciting additional insights for your business valuation.

What is the net asset value and how is it determined?

According to the German Valuation Act (BewG), the net asset value is the sum of the so-called common values of the fixed assets of a company less the debts belonging to the business assets.

“Common value” is a term from tax law and therefore means the market value of an asset.

The net asset value of a company is thus arrived at by determining the substance, i.e. the assets of a company.

For this purpose, the assets (i.e. the real estate, the machines, the commercial and technical equipment, the patents, the financial assets etc. etc.) are valued individually at their market value and added together. Debts and provisions are deducted from this.

While the net asset value assumes that the company will continue as a going concern, the liquidation value, as a special case of the net asset value, assumes that the company will be broken up.

In business valuation, the net asset value thus provides information on the cost of restoring the business.

Our glossary (only in German) informs you about the most important terms used in valuation practice.

When is the net asset value needed in business valuation?

Due diligence in M&A transactions

Company valuations in M&A transactions are almost exclusively based on capitalised earnings value methods or discounted cash flow methods, because these methods attempt to value the future earnings potential of the company. This makes sense, because that is precisely what business transactions are usually about.

However, the determination of the net asset values for machinery and real estate is important at all stages of the process in obtaining important information and key figures.

The determination of the replacement value of machinery and technical equipment provides an opportunity for the risk or insurance due diligence to review the risk management and insurance concepts of a company.

By determining the liquidation values of the machinery – i.e. the values of the machinery when the company is liquidated – the absolute lower limit of the operating value can be established. This makes it possible to check whether the liquidation of the company would yield higher proceeds than the continuation of the business. This is particularly important for financial due diligence.

The determination of the market value or fair value of the individual assets – i.e. the theoretical sale of the machinery if the business were to continue – is, among other things, of decisive importance as a basis for determining the eligibility of the assets as collateral. This is an important factor in the possible refinancing of a company acquisition.

Furthermore, strategic conclusions can be drawn from the values. For example, if the net asset value is noticeably higher than the capitalised earnings value of the company, one can conclude that there are obviously assets in the company that are not necessary for operations or that operating resources are being used inefficiently.

If, on the other hand, the net asset value is significantly below the capitalised earnings value, this indicates that there is a gap in the market. Can this possibly be recognised by other market participants? From this, conclusions can be drawn about the competitiveness of the company.

Particularly in asset deals, the individual valuation of the machinery plays a central role in the context of tax due diligence. The asset deal enables the buyer to make a so-called “step up”. In this process, the machines are revalued at their current market values, whereby hidden reserves are raised and a write-up is made to the original book values. This often results in a significantly increased depreciation potential.

Conclusion: The net asset value of machinery and equipment should always be carried out in a business valuation for M&A transactions, as a large number of additional insights can be gained in this way.

On the determination of inheritance tax

Under tax law, the net asset value may not be undercut when companies are inherited. This means that the net asset value is the lower limit for the inheritance of a business. Alternatively, the liquidation value (as a special case of the net asset value) is to be set as the lower value limit if the enterprise is not continued.

Liquidation value in the case of discontinuation of the enterprise

In general, the liquidation value is a special application of the net asset value if the enterprise is liquidated.