Adjusted Net Asset Value (NAV) / Book Value Method

Adjusted Net Asset Value (NAV) / Book Value Method

The Adjusted Net Asset Value (NAV) Method is commonly used in business valuation, particularly for asset-intensive companies. This method adjusts a company’s book value of net assets to reflect their fair market value.

Procedures for Performing the Adjusted NAV Method

Step 1: Identify the Subject Entity

  • Understand the nature of the business and its industry.
  • Determine if the Adjusted NAV method is appropriate (e.g., asset-heavy businesses like real estate companies or holding companies).

Step 2: Obtain the Latest Financial Statements

  • Gather the most recent balance sheet (audited, if available).
  • Consider using a valuation date balance sheet or an adjusted trial balance.

Step 3: Adjust Asset Values to Fair Market Value

  1. Cash & Equivalents: No adjustments unless there are foreign exchange restrictions or illiquid investments.
  2. Accounts Receivable: Adjust for doubtful accounts using expected credit losses.
  3. Inventory: Revalue obsolete, slow-moving, or damaged stock to market value.
  4. Property, Plant, and Equipment (PPE):
    • Adjust based on appraisals or recent transactions.
    • Consider depreciation and market conditions.
  5. Investments in Subsidiaries & Associates:
    • Adjust based on the fair value of the underlying investments.
  6. Intangible Assets:
    • Identify and value patents, trademarks, customer lists, etc.
    • Consider amortization and impairment adjustments.
  7. Other Assets: Review and adjust miscellaneous assets like prepaid expenses.

Step 4: Adjust Liabilities to Fair Market Value

  1. Accounts Payable: No adjustments unless there are disputes or overdue payments.
  2. Loans & Borrowings: Adjust based on current market interest rates.
  3. Deferred Liabilities: Include provisions for lawsuits, warranties, or environmental liabilities.
  4. Contingent Liabilities: Assess potential off-balance-sheet liabilities and make necessary provisions.

Step 5: Compute Adjusted Net Asset Value

Adjusted NAV=Adjusted Total Assets−Adjusted Total Liabilities\text{Adjusted NAV} = \text{Adjusted Total Assets} - \text{Adjusted Total Liabilities}

Step 6: Consider Non-Operating Assets & Liabilities

  • Exclude or adjust non-operating assets (e.g., excess cash, idle properties).
  • Deduct any non-operating liabilities, if applicable.

Step 7: Apply Discounts or Premiums

  • Marketability Discount (DLOM): If shares are privately held and illiquid.
  • Control Premium / Minority Discount: Adjust based on ownership structure.

Step 8: Reconcile and Review

  • Validate assumptions with market comparables or industry benchmarks.
  • Perform sensitivity analysis to test valuation robustness.

Step 9: Finalize the Valuation

  • Document all adjustments with rationale.
  • Present the Adjusted NAV Calculation in a clear format.
  • Compare with alternative valuation methods for reasonableness.