Early Stage Valuation

CHAPTER 7Asset Accumulation Method

Antonella Pucaand Mark Zyla

The market and the income approaches to business valuation consider the enterprise as an entity in its own right, a legal “person” that can enter into contracts, assume liabilities, and hold title to assets, and that enhances the value of its individual resources with synergies to realize its business purpose. This chapter looks at the enterprise from a different perspective, as an aggregate of individual classes of assets and liabilities that maintain their own distinctive features and need to be valued on an individual basis in order to assess total enterprise value. The assed-based approach invites us to break through the corporate veil and look at individual factors that drive the value of an enterprise: How is value generated? What are the key assets of the enterprise? What are the entity's sources of capital and how are they remunerated? How are the risks of the enterprise reflected in the balance sheet and are there additional liabilities that need to be considered?

This chapter presents the application of the Asset Accumulation method (AAM) (a type of asset-based approach) to a sample early stage enterprise (ESE). Under the AAM, the equity value of the enterprise under ASC 820/IFRS 13 is equivalent to the fair value of its assets net of liabilities. The fair values of assets and liabilities are estimated using a variety of valuation methods, which often involve a combination of the cost, market, and income ...