Discover how to adjust, compare, and reconcile asset-based valuations under going-concern and liquidation scenarios in private company valuation, with a particular focus on intangible assets, control factors, and scenario-based assumptions.
Sometimes, you stumble upon a private company—maybe a niche technology startup with no public trading history—and you’re asked to whip up an estimate of its value. Because it’s private, there’s no readily available market price, and often, you can’t rely on neat trailing P/E multiples from comparable public companies. So you delve into asset-based valuation.
But wait—asset-based valuation can be complex, especially if you think about intangible assets like brand names, intellectual property, or custom software that might be understated (or absent) on the balance sheet. And what if the company is on the brink of liquidation? Add in the possibility that your client is either a minority shareholder or someone gunning for full control, and you’ve got a recipe for a pretty challenging puzzle.
This vignette highlights how to reconcile asset-based estimates under different premises: going-concern vs. liquidation. Along the way, we’ll address balance sheet adjustments, intangible assets, synergy potentials, and ownership structure. It’s a chance to see how real-world valuation scenarios often combine data points from multiple sources. Here, the line between “strictly academic” and “messy reality” begins to blur.
When performing an asset-based valuation, you typically start with the company’s balance sheet. However, the stated book values may not reflect the true “fair value” of each asset or liability. Let’s just say you have a line item like Property, Plant & Equipment (PP&E) listed at historical cost minus accumulated depreciation. Is that anywhere near the market value? Maybe not.
Historical Cost vs. Fair Value:
• Under most accounting standards, assets can be carried at cost. If the company has held real estate for many years, the market value could be significantly higher than the depreciated carrying amount.
• Similarly, intangible assets (like software) might be fully amortized on the books but still have enormous potential market worth.
Example of an Adjustment:
Suppose TechX Inc. has intangible software recorded at zero book value (fully amortized under IFRS or US GAAP). However, third-party appraisers estimate that the software’s current fair value is $2 million if sold or licensed to an interested third party. That’s a big difference!
Potential Liabilities or Off-Balance Sheet Items:
You might find that the company has pending legal claims or intangible obligations (e.g., an unresolved lawsuit for patent infringement). If the balance sheet ignores these, you’ll want to factor them in as possible liabilities at fair value.
The net result is a more accurate “adjusted shareholders’ equity” figure. That adjusted figure represents the rough baseline from which you can further refine your analysis.
Under a going-concern assumption, the company is expected to continue operating. That means intangible assets—like a brand name—carry value because they can generate future revenue streams. Also, synergy matters. For example, if a strategic acquirer could integrate TechX’s technology into a broader ecosystem, the intangible assets might be worth more to them than to the open market.
• Leveraging Intangibles: “Brand recognition,” loyal customer relationships, intellectual property—these intangible assets might not show up on the balance sheet at all, or they might be undervalued. Yet, they contribute to the overall value if the business remains operational.
• Synergy Potential: If a larger competitor sees real synergy in TechX’s proprietary software, the intangible might command a premium beyond typical “fair value.”
• Adjusted Equity as a Floor: In a going-concern scenario, the adjusted asset-based valuation might serve as a floor—an absolute minimum—because a buyer typically values future cash flows as well.
If the company fails to secure next-round financing, or if you suspect that it’s headed toward shutting its doors, the liquidation premise takes over. Here, each asset is assessed based on forced-sale or orderly-liquidation prices, which might be lower—or sometimes higher—than book value, depending on the asset class and market conditions.
• Forced Sale vs. Orderly Liquidation: Forced-sale values can be significantly lower because of time constraints or a distressed environment. An orderly liquidation, on the other hand, might allow for better price realization.
• Adjacent Costs: Liquidation often involves additional costs (e.g., severance, broker fees, legal expenses). If you’re forced to sell specialized equipment in a niche market, you might have to discount heavily.
• Cash Burn and Liability Acceleration: Certain liabilities become due sooner in liquidation, which further offsets the gross liquidation proceeds.
Let’s face it: Ownership structure complicates everything. Are you valuing a controlling stake or a minority interest? Control premiums and minority discounts can shift the final valuation dramatically.
• Control Premium: If you’re buying a majority stake, you might pay extra because you get the power to direct the company’s future, forge strategic partnerships, and realize potential synergies.
• Minority Discount: If you only grab a minority stake, you might pay (or receive, if you’re the seller) less, because you lack certain voting rights and control privileges.
• Synergy Realization: Typically, synergy is easier to realize if you have effective control. A non-controlling stake might not fully capture synergy benefits, reducing your willingness to pay a premium.
Below is a condensed scenario for TechX, a private player in advanced data analytics:
• Balance Sheet (simplified, in millions):
• Additional info:
Adjust to Fair Value (Going-Concern):
Considering Control Premium or Synergy:
Minority Perspective:
Forced-Sale Values:
Adjusting for Liabilities and Liquidation Costs:
Reconciling the Results:
In practice, you don’t just pick one approach. Often you weigh the probabilities, or you might rely on an income-based approach or a market-based approach to sanity-check these asset-based results.
But especially for the CFA exam context, you want to articulate how each assumption changes the numbers, demonstrate the adjustments to the balance sheet, and finalize a reasoned “range” of values. Then you highlight which scenario is more likely or more relevant to the question’s vantage point (e.g., controlling buyer vs. minority sale).
flowchart TB
A["Start with<br/>Book Balance Sheet"] --> B["Adjust Assets <br/>to Fair Value"]
B --> C["Deduct Liabilities<br/>(Fair Value)"]
C --> D{"Decision<br/>Context?"}
D --> E["Going Concern <br/>Valuation"]
D --> F["Liquidation <br/>Valuation"]
E --> G["Apply Control<br/>Premium / Minority<br/>Discount"]
F --> H["Factor Forced-Sale <br/>Prices & Costs"]
G --> I["Reconcile & Arrive <br/>at Range of Values"]
H --> I["Reconcile & Arrive <br/>at Range of Values"]
In this flowchart, we start with a company’s book balance sheet, make adjustments to reflect fair values, then consider whether the company or its assets will be treated as a going concern or subject to liquidation. From there, we factor in the effect of ownership structure—whether a control premium or a minority discount might apply—and conclude with a final range of valuations that require professional judgment to reconcile.
• Don’t Overlook Intangibles: Often the biggest “hidden value” in a private company is intangible—like brand or intellectual property. But always confirm that these intangibles can be monetized (transferable, protective IP rights, etc.).
• Liquidation Costs Add Up: Be sure to include severance, legal, brokerage, and maybe even environmental cleanup costs when you do a liquidation approach.
• Document Your Assumptions: In a real case, you might be called to testify about your valuation. If so, you’ll need robust documentation of each assumption.
• Synergy is Not Guaranteed: Synergy-based premiums can be ephemeral. A competitor might lose interest or find integration too costly.
• Minority Discounts Vary: They depend on local market conditions, legal protections for minority shareholders, and share liquidity.
In the CFA environment, you’re likely to see an item set with partial data on a private company. Pay close attention to footnotes or side comments about intangible values, synergy potential, or ownership stakes—these typically hold key insights about which approach to prioritize or how to adjust your final number.
• Time Management: The biggest risk is overthinking each step. A bullet-point approach might help in structuring your answer.
• If They Ask for a Range: Provide both going-concern and liquidation-based estimates, then weigh in on the context.
• Reference the LOS (Learning Outcome Statements): Keep an eye on the specific tasks—are you asked to do simple arithmetic or to discuss conceptual differences?
• CFA Institute Level II Sample Item Sets – Private Company Valuation
• Hitchner, J. (2022). Financial Valuation: Applications and Models. Wiley.
• Damodaran, A. (2022). “Data Library” – asset and risk premia data, available at http://pages.stern.nyu.edu/~adamodar/
• The Appraisal Foundation (USPAP): Uniform Standards of Professional Appraisal Practice
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