The adjusted net asset valuation (ANA) methodology is a method used to value a company or business by adjusting the value of its net assets. This method takes into account both tangible and intangible assets, as well as any liabilities, to arrive at a fair market value for the company.
The ANA methodology is generally used where there is no expectation of any type of intangible assets and/or commercial (saleable) goodwill and is typically used in the following situations:
- Valuation of an investment (i.e. investments in marketable securities, operating companies etc.) or a real estate holding company (since the value is closely related to the value of the company’s underlying assets as opposed to its earnings capacity).
- An operating business that does not generate sufficient earnings to realize a reasonable return on the company’s net tangible assets. We see this often with companies that are struggling to generate profit (versus breakeven or slightly profitable)
- An operating business where all of the income is attributable to personal goodwill. That is the goodwill is not saleable to a purchaser. An example would be as in the case of a medical doctor’s professional corporation, where the clients identify with their actual doctor as opposed to the business itself (i.e. the professional corporation generates revenue purely due to the doctors’ personal expertise and personal relationships with their clients).
- Valuation in specific industries where purchasers generally do not consider goodwill or intangible value. An example is certain construction businesses that generate revenues through tender bidding such that very little weight is placed on the name or reputation of the business.
- Asset-based lending – Used by banks and other financial institutions to evaluate a company’s assets as collateral for a loan and therefore as a risk assessment tool regarding the decision to lend money.
Sample case #1 (Simplified) study using the ANA methodology:
A company, XYZ Inc., is a manufacturer of widgets. The company’s balance sheet outlines $10 million in tangible assets (e.g. cash, inventory, etc.), $5 million in specified intangible assets (e.g. customer list, patents and other intellectual property etc.), and $3 million in liabilities (e.g. payroll, credit cards, etc.). Using the ANA methodology, the value of the company would be calculated as follows:
Tangible assets: $10 million plus Intangible assets: $5 million minus Liabilities: -$3 million equals Adjusted net assets: $12 million
Therefore, using the ANA methodology, the fair market value of XYZ Inc. would be $12 million.