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The Asset Approach to Aviation Business Value

✈ May 17, 2017, Avicor Aviation Inc.

In valuing a business, there are several approaches that can be taken, and within each approach are a number of specific methodologies that can be applied. Which approach and method is selected depends on a number of factors. Last time, we discussed some of the questions that need to be answered in selecting the right approach and method. To each of these methods certain discounts may need to be applied to actually determine the value, but we will start with a discussion of the most common methods.

Key to the asset approach of valuing an aviation business are the company's assets. Typically, the asset approach is used when a business is asset intensive, meaning that there are a lot of assets in the company, and usually these assets are integral to the operation of the business. Examples might include a firm that manufactures aircraft parts, a charter company that owns most of its aircraft fleet, or an FBO that owns the land it is on and the buildings out of which it operates.

Within the asset approach are three primary methods that are most used to value businesses. These are the book value method, the adjusted book value method, and the liquidation value method.

Book Value Method

The book value method is the simplest method that can be used. It relies almost exclusively on a company's existing financial statements to determine the value. In a "nutshell" this method basically involves taking all of the assets on the balance sheet and subtracting all of the liabilities on a balance sheet to determine what is left. The result is the equity in the company and this forms the basis of the value.

Adjusted Book Value Method

An adjusted book value method starts with a company's historical balance sheet at a selected date. It could be the latest available balance sheet, or it could be a date selected because of a particular event that took place. Like the book value method, the adjusted book value method considers the assets and subtracts the liabilities, but adjustments are made to the values of the company's assets and liabilities.

This method takes a close look at the values of the various assets in the company being valued and brings them to market levels. For example, with an air charter company, this would include appraising each of the aircraft the company owns. If the business has real estate holdings, those would need to be appraised as part of the process and the appraised values would be used in determining the overall value. In a similar manner all of the assets of the company are considered and adjustments are made to the balance sheet to indicate the market value.

Adjusting the values may also require a look at the liabilities of the aviation business. Some of the adjustments could be removing internal loans or debt that is actually not tied to the business but carried on the books. Interest rates for debt could be adjusted and may affect the value used. The overall objective is bring the base value of the business to market value.

Liquidation Value Approach

The liquidation value is, to put it bluntly, just as it sounds. It involves looking at the business with the question, "what could these assets be sold for today?" Liquidation value typically produces the lowest possible value for a business and is the method applied most often when a business is going out of business. Usually liquidation value is below market value, but sometimes the market is at liquidation value, like, for example the values of certain aircraft post 2008.

Next week we will be discussing some of the methods used in the income approach to valuing aviation businesses. Instead of looking at the balance sheet, the income approach is more concerned with the income generated....but more on that next week!

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