Rules for Tangible Asset Valuation
Tangible assets have a physical form and offer their owners a certain value. They are either pieces of property or equipment that hold a specific value or are capable of generating revenue for the owners in the future. These assets can be of two types, current and fixed assets. The current assets are short-term investments that can be quickly translated into profits or a monetary value with greater liquidity. For example, all types of cash equivalents, inventories, and deliverable accounts are liquid/current assets of a company. On the other hand, fixed assets are those that take a longer time for cash conversion. For example, any building, tools, equipment, tools, and machinery do not easily offer cash equivalents but take some to either be sold or increase revenue through their utilities.
Why are tangible assets important for a business?
For a business to run successfully, tangible assets can be depreciated for a specific period. As a result, they offer a significant tax benefit while also allowing lesser cash outflow. The liquidity that these assets offer a business helps the revenue exceed the investment. Also, businessmen can use these assets to secure more loans by reflecting them as collateral security. They are seen as credibility factors by the investors and hence provide more financial value to the company.
What is tangible asset Valuation and why does it matter?
A company’s appraisal of tangible assets not only provides an economic value but also are essential in handling property taxes. An inaccurate valuation of a business can be expensive both financially and legally. When a comparative study on net tangible assets value for every share with the present market share value of the company is done, you can better understand if the business is under or overvalued. Valuing these tangible assets will help identify the issues within the existing asset systems and replace or refinance them for future purposes. Higher net asset values can also lower the risk factors and make businesses eligible for more credits.
How to conduct a tangible asset Valuation?
When considering a tangible asset Valuation of your company, it is important to understand which among the three classic methods of valuation suits your business operation. The three methods are detailed as the following.
Appraisal method
In this method, the company hires an appraiser who will research and arrive at the right market value of all the tangible assets. Apart from this analysis, it is also the role of the appraiser to evaluate what condition the assets are in, the intensity of damages in them, and the history of the assets. Now, both the values are compared and the possible value of the tangible assets of the company according to the market rates is arrived at.
Liquidation method
The company assigns a person who can assess the tangible assets accurately. The assessor analyses the value that these assets will receive if they were to be sold to a buyer or an auction house. The value that the potential buyers are ready to offer determines the value of the current tangible assets of the company. The liquidation method considers the assets as a cash equivalent and arrives at a minimum value at which they can be sold.
Replacement cost method
The assessor here determines the value it would take to replicate the look and function of an asset. The cost required to reproduce or replace the existing asset, probably with updated features, is the value of the tangible asset in consideration. The assessor here is usually an insurer who can assign an insurance value for every asset.
How do value net tangible assets?
To understand the value of net tangible assets, employers must be aware of their net liabilities and net intangible assets. The higher net value company possesses, the lower liquidity risks it has to face. Similarly, increasing the value of net tangible assets can protect your company from market uncertainties in the future while parallelly increasing the stock value of the company. The following formula can be used to determine the net tangible assets of a company.
NTA value = The current FMV of tangible assets — FMV of total liabilities.
NTA- Net Tangible Assets
FMV- Fair Market Value
This will help you understand if your company is undervalued or overvalued.
Tips to ensure proper valuation of tangible assets
Before gearing up for a business valuation, it is crucial to understand the purpose behind it. Valuation for purchasing or selling an asset can be different from the valuation process done for taxation purposes. It can help you hire the right assessor. Also, have a detailed report of all your financial activities for the year. Analyzing these reports can help you understand the kind of returns you can expect out of the assets. Also, seek the help of a professional consultant to comply with legal policies.
Summing up
If you are looking for an accurate valuation of your business, Eqvista is the right place to begin. We offer expert opinions and customizable plans to make the otherwise exhaustive valuation process simpler. To talk to our professional valuation expert, join us on a discovery call.
