Not every company is valued based on profit or growth. Sometimes, the value of a company’s assets speaks louder than its income statement. This is true, for example, of capital-intensive companies or companies facing financial difficulties. In such cases, you look at the intrinsic value or the liquidation value. In this blog, you’ll learn what the difference is, when to use these methods, and what to keep in mind.
What is intrinsic value?
Net asset value is the difference between all assets and liabilities on the balance sheet, adjusted for accounting distortions. In other words, you look at the economic value of assets and liabilities, not just their book values.
Examples of corrections include:
- Real estate that has been carried on the balance sheet at historical cost for years
- Machinery with a market value lower than its book value
- Provisions or liabilities that are actually higher or lower
This provides a realistic picture of what would remain if the company were to be liquidated today.
When do you use intrinsic value?
This method is particularly useful in specific situations, such as:
- In real estate or investment companies, where value lies primarily in assets
- In the event of restructuring or bankruptcy, when profitability is less relevant
- As a lower limit in addition to other valuation methods
- For holding companies or asset-intensive businesses
For companies with a high proportion of intangible assets, such as brand value, technology, or customer relationships, this method is often less suitable.
What is liquidation value?
The liquidation value is a conservative measure of net asset value. It is based on the assumption of a forced sale: how much would the assets fetch if they had to be sold quickly?
When doing so, take discounts into account, for example:
- Machines that fetch a lower price at auction than when in use
- Inventory that is only partially saleable
- Accounts receivable, a portion of which turns out to be uncollectible
- Real estate that must be sold under pressure
The liquidation value is almost always lower than the net asset value. It primarily provides insight into a worst-case scenario.
What should you keep in mind when revaluing?
Revaluation requires realistic justification. Appraisals, market prices, and benchmarks are crucial in this regard. Only with evidence can you demonstrate that the balance sheet value is representative.
It is also important not to overlook the liabilities side. Liabilities and provisions can have a greater impact than expected, especially in the event of a sale or liquidation.
When are these methods less suitable?
The balance sheet-based approach falls short for companies whose value lies precisely in intangible factors, such as customer relationships, brand, or personnel. In such cases, cash flow or market-based approaches (DCF, multiples) provide a more accurate picture.
Frequently Asked Questions
When should you use intrinsic value as a valuation method?
For asset-intensive companies, restructurings, or as a lower bound for other valuations.
Is book value the same as intrinsic value?
No. Book value is an accounting measure, while net asset value adjusts for economic reality.
What is a realistic liquidation value?
It varies by sector, but expect significant discounts: often 20% to 70% lower than the economic value.
Would you like to know what your company is worth based on its balance sheet? Or are you considering a restructuring or contingency scenario and seeking insight into it? Contact Hogenhouck M&A. We’ll help you calculate the intrinsic and liquidation value clearly and professionally.
