Net book value analysis values a startup based on its assets and liabilities on the balance sheet. Here’s an overview of how this valuation method works:
What is Net Book Value
Net book value = Total Assets – Total Liabilities
It provides an estimate of what shareholders would receive if the company was liquidated today and assets sold off. Assets are recorded at original cost less depreciation/amortization.
When Net Book Value Applies
This method works best for:
– Asset-heavy startups like manufacturing companies with significant tangible assets.
– Startups where asset value far outweighs growth potential.
– Companies with low future profit expectations.
– Startups focused on providing shareholder payouts versus growth.
Limitations
Net book value doesn’t capture intangible assets like intellectual property, brand value, goodwill. It also doesn’t account for future profit growth potential.
Therefore, net book value acts as more of a liquidation value floor rather than a complete valuation method. It’s best used along with DCF models and market-based approaches.
