These – not very desirable - particularities do not leave many options for valuation. In such situations, the ‘last resource’ is the asset-based approach, which can still be a good methodology to apply in this scenario.
In this approach, we are subtracting the fair value of liabilities from the fair value of the assets. The concept of fair value is crucial here. In financial markets, fair value can be broadly described as the price agreed between a knowledgeable buyer and a seller that enters in a transaction freely (not due to financial distress).
Certain assets are readily considered at fair value (e.g. cash, and other current assets easily convertible into cash). For other non-current assets, the calculations are subject to the valuator’s experience and knowledge. There are different accepted practices in the market, either adding back the value of depreciations and amortizations, or including discounts due to the illiquidity of the assets (e.g. non-current assets that will be difficult to sell) or discounts due to credit risk (e.g. receivables that would not be recovered).
No matter what option is chosen, bear in mind that determining the fair value of the assets is a key point in this methodology and will massively drive the final valuation. As an example: current assets accounted in the balance sheet for 10 EUR, non-current assets 100 EUR and liabilities 80 EUR. If non-current assets are considered already at fair value, the company valuation will be 30 EUR. On the other hand, if adjustments are made to non-current assets and the fair value is taken as 80 EUR, the final value of the company will decrease to 10 EUR.
On the liabilities side, most of the time the value presented in the balance sheet can be taken as ‘fair’ and no additional adjustments are expected. Once the value of the assets and liabilities is determined, it is easy to calculate the enterprise value by deducting liabilities from assets.
There is a lot of controversy around the asset-based approach, it is considered a valid methodology to value private companies, but it is also criticized because its lack of robustness. However, it does give an indication of value when there are poor financial results and a limited view on the future cash flows of the company.