Any physical property or right that is
owned and has a monetary value, generally
appearing as one of the major categories on
a financial balance sheet.
Assets are economic resources that are
owned by a business and are expected to
benefit future operations. They may have
definite physical form such as buildings,
equipment, or office furniture, or be
intangible such as accounts receivable,
investments in government bonds, or a
patent.
Example of an Asset
Buyer Patton, a registered real estate
broker, is analyzing the assets from the
balance sheet of ABC Realty Inc., a local
real estate operation currently listed for
sale. As the illustration reveals, the
corporation has total assets of $408,013
consisting of $131,613 in current assets and
$276,400 in fixed assets.
Patton, in the review process, will have
many other factors to consider in the
decision-making process; e.g., listing
inventory, number of salespeople, and volume
of sales.
Assets can be purchased
outright, financed through a loan, or leased
by a financial or operating lease. The
difference between the two leases revolves
around cancellation provisions. A financial
lease cannot be cancelled at any time and
must confer ownership within a reasonable
period, or be of such a length that the
lessee will derive all the benefits of
ownership from its useful lifespan. An
operating lease may be terminated provided
that proper notice is given. Often, an
operating lease is referred to as a rental
lease , a good example of which is telephone
equipment within a brokerage office.
The decision on leasing
or purchasing assets will depend on a
variety of factors. Considerations are
illustrated bellow.
A sophisticated form of
property management under which the managing
agent organizes and operates the total real
estate venture and whose concern extends
beyond net operating income.
Often businesses are
valued simply based on saleable assets
without regard to financial performance.
Inventory, equipment, fixtures, and supplies
are analyzed separately with no
consideration given to the operating
business as it is normally excluded from the
sale. Obviously, the seller will want the
highest figure and the buyer the lowest. The
amount paid for assets largely depends on
the negotiating strategies of the parties.
As with adjusted book value, bargaining
typically ranges between book value and fair
value for assets. Asset valuation is a
popular technique as the individual is not
acquiring the business, only its assets.
Accordingly, any potential liabilities are
not being assumed.
A wide range of
calculation methods are found in the
marketplace given unique businesses and
negotiating strategies. To complicate
matters, clear-cut lines between asset
valuation, adjusted book value, and other
valuation techniques can become blurred. For
example, goodwill can arise in negotiations
despite financial performance of the
business. This non-tangible asset may
nevertheless have value, e.g., the
longstanding reputation of the business, the
capabilities of management and staff, and
product reputation. Goodwill is typically
quantified by analyzing above average return
on investment (attributable to goodwill),
however, this is not to say that goodwill
cannot exist even with marginal earnings.
Again, buyer and seller perspectives
frequently drive negotiations. In such
instances, goodwill is regarded like any
other asset such as equipment, inventory, or
other tangible items.
Asset valuation can also
expand to other values, for example,
leasehold interests. Assume a business
leases 2,000 square feet with a particularly
favorable rate, e.g., $7.00 per square foot
for four years and current market rent is
$15.00. If the current rate remains at
$15.00, the leasehold benefit is:2,000 square feet x $8.00 x 4 years
= $64,000
Using the discounted
cash flow and an appropriate rate, the
present value of this economic benefit can
be established and included in the value of
the business.
Adjusted book value or
asset valuation can be useful as a secondary
valuation technique to confirm or dispute
capitalization or discounted cash flow
approaches. Two alternate business valuation
methods, the liquidation method and the
formula method, are not detailed as they
involve extensive judgmental factors by the
valuator.
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