What Is Asset Valuation and What Is Its Importance?

If you’re preparing to insure, buy, sell or let another entity take over your company, you need asset valuation. Asset valuation is the process of determining the value of a certain property, including real estate, stocks, bonds, equipment, buildings and more. It determines both assets and liabilities, which can be categorized as tangible or intangible. The importance of asset valuation in San Francisco, CA is crucial to ensuring whether you’re getting a good deal.

Tangible and intangible assets

Tangible assets include physical assets like land, products, equipment, machinery, buildings and cash. The valuation company will subtract the intangible assets and liabilities from the total asset valuation to determine the net tangible asset value.

Intangible assets are things that could (or do) bring value to the company, such as patents, trademarks, franchises and intellectual property. Even if you lose all of your tangible assets, your company can still have value from intangible assets. There are several ways to determine the value of intangible assets, such as the historical price for which they were bought, the market or standard costs and the base stock method. The method used depends on the specific company, the assets and the financial structure.

When intangible assets are involved, how they’ve been previously managed is important to valuation. Have they been used to create cash flow? How much cash flow do they generate? Could this change in the near future? These are some of the questions auditors will consider.

Why is asset valuation important?

Here’s a closer look at some of the reasons asset valuation is so critical:

  • Ensures you’re getting a good deal: If you’re buying or selling an asset, you want to ensure that you’re getting the right price for it. No one wants to overpay—nor do you want to find out you sold a billion-dollar patent for a song. Asset valuation is an objective way to make sure all interested parties get what they pay for.
  • Helps companies determine their true value: When companies merge or get taken over, it’s important for the new owners and management to understand each company’s true value. This is usually important when new management wants to make changes, such as increasing profitability or altering manufacturing techniques.
  • Required in audits: Public companies are regulated by the government, which means they’re required to show financial statements on a regular basis. Part of audited financial statements involves asset valuation, so the government regulatory agencies can review their processes.
  • Often required for business loans: Like consumers, businesses have to show financial worthiness before they’re approved for loans. In many cases, lenders are interested in knowing how much the business is worth. There’s no sense in loaning more funds than a business has in collateral, after all.

This is just an overview of asset valuation. As you might imagine, the reality is far more complex and may involve other methods or reasons for valuation. Whatever the reason you need asset valuation, however, it’s the best way to understand the true value of what you’re dealing with.

To learn more about the importance and value of asset valuation in San Francisco, CA, call Medina & Company Consulting, Inc.