After examining the Discounted Cash Flow (DCF) method, which focuses on future projections, it's crucial to understand enterprise valuation from a different angle: that of its assets. The Net Asset approach, also known as the Patrimonial method, determines a company's value by re-evaluating its assets and liabilities at a given point in time. This method is particularly relevant for companies whose value heavily relies on their fixed assets (real estate, heavy equipment) or in contexts of asset divestiture.
What is Adjusted Net Book Value (ANBV)?
Net Book Value (NBV) is the foundation of the patrimonial approach. It represents the difference between total assets and total liabilities as recorded on the balance sheet. In essence, it's what would remain for shareholders if the company sold all its assets and repaid all its debts, based on their book values.
However, the book value of assets and liabilities doesn't always reflect their true economic or market value. This is why the concept of Adjusted Net Book Value (ANBV) is used. ANBV aims to provide a fairer picture of the company's real value by making adjustments and revaluations to balance sheet items.
Calculating Adjusted Net Book Value (ANBV)
The calculation of ANBV involves several steps, starting from the accounting balance sheet:
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Starting Point: Net Book Value (NBV)
NBV is calculated from the company's balance sheet:
$$ \text{NBV} = \text{Total Assets} - \text{Total Liabilities} $$
Or, equivalently, starting from shareholders' equity:
$$ \text{NBV} = \text{Shareholders' Equity} $$
(These two formulas are equivalent if the balance sheet is balanced, but the assets - liabilities approach is more direct for corrections.) -
Adjustments and Corrections:
This involves adjusting the NBV to reflect the company's true economic value. These corrections generally include:
- Fictitious Assets: Elimination of asset items that have no real market value (e.g., formation expenses, capitalized research and development costs that did not result in marketable patents).
- Untaxed Capital Gains or Losses on Assets: Revaluation of fixed assets (land, buildings, machinery) and inventory to their current market value. If the market value is higher than the book value, an untaxed capital gain is added; if lower, an untaxed capital loss is deducted.
- Unjustified Provisions: Reintegration of accounting provisions that are no longer relevant or are overvalued (e.g., provisions for obsolete risks).
- Deferred Tax Liabilities: Accounting for deferred taxes related to untaxed capital gains. If a capital gain is recognized on an asset, it will be taxable upon its future sale. Therefore, a corresponding "deferred tax liability" must be deducted. Conversely for capital losses.
- Off-Balance Sheet Assets and Liabilities: Integration of elements not directly on the balance sheet but having value (e.g., lease contracts, ongoing litigation, uncapitalized competitive advantages or disadvantages).
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The ANBV Formula:
Considering these corrections, the ANBV formula becomes:
$$ \text{ANBV} = \text{NBV} + \text{Untaxed Capital Gains} - \text{Untaxed Capital Losses} $$
$$ - \text{Fictitious Assets} + \text{Unjustified Provisions} - \text{Deferred Taxes related to adjustments} \pm \text{Other Off-Balance Sheet Items} $$
This complex formula underscores the importance of detailed financial analysis and valuation expertise.
Simplified ANBV Calculation Example
For **Example -1**, let's take an initial NBV of 16,603.90 thousand euros (a value from the previous valuation, which could be its net book value on the balance sheet). Assume the following adjustments:
- Untaxed capital gain on real estate (market value > book value): + 2,000 thousand euros
- Untaxed capital loss on obsolete inventory: - 500 thousand euros
- Fictitious assets (formation expenses) to eliminate: - 100 thousand euros
- Unjustified litigation provision: + 200 thousand euros
- Deferred tax on real estate capital gain (25% rate): - $2000 \times 0.25 = 500$ thousand euros
$$ \text{ANBV} = 16603.90 + 2000 - 500 - 100 + 200 - 500 = 17703.90 \text{ thousand euros} $$
The ANBV for **Example -1** would therefore be 17,703.90 thousand euros after these corrections.
Advantages and Limitations of the Patrimonial Approach
Advantages:
- Relative Objectivity: Based on concrete balance sheet items, it may seem more tangible than future forecasts.
- Relevance for Certain Sectors: Ideal for "dormant" companies, patrimonial holdings, real estate companies, or those with cyclical and difficult-to-predict activity.
- Liquidation Value: Provides a good estimate of the company's liquidation value in case of business cessation.
- Complementarity: Excellent basis for mixed methods (combining net assets and profitability, such as Goodwill).
Limitations:
- Static View: Does not account for the company's future ability to generate profits (its "profitability"). A company with a high ANBV but recurring losses is not necessarily worth its net assets.
- Complexity of Adjustments: Revaluing assets to market value is subjective and can be difficult to perform accurately.
- Exclusion of Intangibles: Often underestimates non-balance sheet intangible assets (reputation, know-how, customer base, brand, unvalued patents) which are crucial for modern value creation.
- Reliance on Past Data: Based on balance sheet data, which are historical.
Conclusion
The Adjusted Net Book Value (ANBV) valuation method is a cornerstone of enterprise valuation, offering a view of value based on corrected tangible and intangible assets. While it doesn't directly consider future profitability potential, it is indispensable for a comprehensive analysis, especially in combination with cash flow or profitability-based methods. Understanding ANBV allows for grasping a company's "floor value" or "liquidation value" and provides a solid foundation for sale or acquisition negotiations.
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