Asset-Based Approach
The best way to find out what something is worth? Sell it. Short of that, analysts have to make educated guesses.
When trying to figure out the value of a company, several ways to calculate these estimates exist. The asset-based approach represents one common way.
The math involved can get complicated, but the concept is fairly simple. To figure out the how much a company is worth, add up the value of the assets owned by the firm.
There are limitations to this approach. Not every company can get boiled down to the sum of its assets. McDonald's is worth more than a bunch of real estate and a pile of hamburger meat. Its brand, its business process and other intangible benefits make it more valuable than the asset-based approach would imply.
For that reason, the asset-based method only makes sense in certain situations, such as holding companies or companies that are failing and headed for liquidation.
Related or Semi-related Video
Finance: What is a Holding Company?6 Views
Finance a la shmoop what is a holding company? okay okay enough of that [Man and woman crying in each others arms]
different kind of holding company your great grandpappy Milton died and left
you 20 million bucks you've always wanted to own your own bar or like 20 of
them so you hop in your f150 which you lovingly named Roscoe and you buy 20
bars for a million dollars each but they produce so much cash that well a year
later you have five million bucks to spend on more bars but you're kind of [Car drives between bars across the US]
done with driving all over creation in old Roscoe there so you buy a mega
distillery and then you buy a DJ music management company and then you buy an
insurance company specializing in insuring bars you know it's a lot of
pool tables and fights that happens in that way in movies anyway and then you [Man punches a man at a pool table]
buy a pool cue stick supply company because well in those fights they
always seem to be the first thing to break each of these businesses exist
separately and makes money on its own so you have a whole pile of assets here
kind of different divisions they're pretty well separated in each of which
kind of lives on its own but it's happy to have a dotted line relationship with
the other companies that are sort of in the family and you note that in any [Person highlights day in the calendar]
given year one company might be very profitable while another might be losing
money so you come up with a clever idea of having a holding company put all of
the assets into one legal entity framed as an operating company so that taxable
gains from one division can be efficiently offset by losses from
another and the party rages on so this is a pretty common structure in [People partying at a club]
industries where one hand kind of sort of washes the other
check out all the little companies that comprise Time Warner, HBO, Turner, TBS and
kind of part of Hulu and on and on and on and what about alphabet you have a
holding company for Google yeah well there's you know YouTube and nest labs
and calico and WayMo a bunch of other stuff so yeah a holding company holds
other companies and a lot of times it's done just for tax optimization and for
friendly dealings among the various partners got it when things aren't going well well [Man and woman crying]
and it's a different kind of holding company and there's a whole lot of
crying....
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