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Valuation Formulas: Book Value & Liquidation Value

By Michelle Collins & Julie King

Book and Adjusted Book Values

This form of valuation is based on the books of a business, where owners' equity – total assets minus total liabilities – is used to set a price. There are a couple of problems with this simplified approach. First, unless you audit the business' books, you cannot be certain that the numbers presented are correct. Secondly, the value of some assets, such as buildings, equipment and furniture/fixtures, may be overstated on the books, and may not reflect the maintenance and/or replacement costs for older assets. As a result, some business valuation experts will use an adjusted book value.

Using the Tangible Book Value, intangible or soft assets are deducted from the total assets.

The Economic Book Value, on the other hand, includes intangible assets and allows assets to be adjusted to their current market value.

The Liquidation Value

This approach is similar to the book valuation method, except that the value of assets at liquidation are used instead of the book or market value of the assets. Using this approach, the liabilities of the business are deducted from the liquidation value of the assets to determine the liquidation value of the business. The overall value of a business using this method should be lower than a valuation reached using the standard book or adjusted book methods.