The adjusted net asset method: asset-based valuation and when to use it

Published October 25, 2026 · Rules checked against SBA and IRS sources as of October 2026

Check: $150,000 + $380,000 + $260,000 + $700,000 - $450,000 = $1,040,000.

When it's the primary method

• Earnings don't justify a return on the assets employed.
• Holding or investment companies.
• Liquidation or orderly wind-down.
• Very early-stage companies with mostly tangible assets.

Why lenders care

Tangible assets are what's left if things go wrong. SBA collateral rules discount them further: used equipment at 50% of net book value or 80% of orderly liquidation value, for example. See equipment appraisals.

The method, step by step

1. Start from the balance sheet at the valuation date. Use accountant-prepared statements where possible, tied to the tax return.
2. Restate each asset to market. Age receivables and write down what won't be collected; count inventory and remove obsolete or slow-moving items; appraise equipment and real estate rather than using depreciated book values.
3. Add assets the books don't show. Customer lists, trade names and other intangibles may have value even though they were never recorded. If they're valued separately, the method starts to capture part of goodwill.
4. Restate liabilities. Include accrued items, customer deposits and anything contingent (warranty claims, pending disputes). In a stock purchase, the buyer inherits all of them.
5. Consider tax. In a stock purchase, some appraisers consider the tax that would be due on built-in gains if assets were sold; in an asset purchase the buyer gets a stepped-up basis, so the question doesn't arise in the same way.

Lenders lean on the asset approach in three situations: when earnings are thin relative to the assets employed, when a deal is equipment- or inventory-heavy and the collateral question drives the structure, and as a sanity check that the income approach hasn't produced a value below what the assets alone would fetch.

Market value is not collateral value

Lenders read an asset-based valuation twice: once for what the assets are worth, and again for what SBA lets them count toward a "fully secured" loan. The SOP discounts each class heavily. Using the same illustrative manufacturer, and assuming an orderly liquidation appraisal of the equipment at $600,000:

Illustration, not a real deal. Without the orderly liquidation appraisal, the equipment would count at 50% of its $350,000 net book value, just $175,000. SBA doesn't decline a loan solely for lack of collateral, but it does require the lender to take what's available, and this gap is why goodwill-heavy deals rest on cash flow. See SBA collateral rules.

Going concern vs liquidation premise

The asset approach can be run on different premises of value. Going concern value is what the business is worth as an operating enterprise, including workforce, customers and goodwill; liquidation value is what the assets would bring if it stopped. When a business earns too little to justify its assets, liquidation value can exceed going concern value, and the asset approach sets the floor.

For hotels, car washes and other special purpose properties, SBA's going-concern appraisal by a Certified General Real Property Appraiser must split value among land, building, equipment and intangible assets, because only the tangible pieces are dependable collateral. See special purpose rules.

Machinery and equipment appraisals

For SBA 7(a) collateral, used machinery and equipment (excluding furniture and fixtures) counts at no more than 50% of net book value, or 80% of orderly liquidation value if the lender has an orderly liquidation appraisal, minus prior liens. So an equipment appraisal can lift collateral credit sharply on equipment-heavy deals. In the 504 program, SBA requires an equipment appraisal when used equipment in the project is bought from a non-dealer or refinanced.

The collateral math

The appraisal helps most when equipment is well maintained and the book value has been depreciated far below what it would actually sell for.

Premises of value an equipment appraiser can use

Make sure the engagement asks for the premise the lender needs. A report giving only fair market value in continued use won't support the 80% orderly liquidation credit, however detailed it is.

When it's worth ordering one

The appraisal costs money and time, so lenders order it where it changes the answer. It usually pays when equipment is a large share of the deal (construction, manufacturing, trucking, car washes), when book values have been depreciated far below what the equipment would actually sell for, or when an extra slice of collateral moves the loan toward "fully secured". It's less useful when the equipment is small relative to the loan, or old and specialized enough that orderly liquidation value would be low anyway.

Equipment in the rest of the deal

The same appraisal often does double duty. In an asset purchase, equipment is a Class V asset on Form 8594, and the allocation of price to equipment should be at or below fair market value; an equipment appraisal supports that number. The business valuer can also use it to check the asset approach floor. Vehicles are handled separately for liens: the lender doesn't have to lien a vehicle that already has a lien or is worth $20,000 or less when the loan number is assigned, and can support that value with an orderly liquidation value from an appraisal.

What a good equipment appraisal includes

• On-site inspection (SBA's 504 rule requires it for project equipment).
• Itemized list with make, model, serial, age and condition.
• Value premise stated: orderly liquidation, forced liquidation or fair market value in continued use.
• Appraiser's qualifications and independence from the transaction.
• Dated within 12 months of the application (the 504 requirement).

Related: SBA collateral rules.

Reading the appraisal as a lender

Three checks catch most problems. First, does the itemized list match what the purchase agreement says is being sold? Equipment that's leased, owned by the seller personally or excluded from the sale shouldn't be in the collateral number. Second, were prior liens identified? SBA's credit is 80% of orderly liquidation value minus prior liens, so an unpaid equipment loan reduces it dollar for dollar. Third, is the inspection recent and on site? A desk appraisal from photos is weaker evidence of condition, and the 504 program's rule for project equipment requires an on-site inspection.

For trucking, construction and other fleet-heavy businesses, the equipment appraisal is often the most important collateral document in the file, and worth ordering at the same time as the business valuation so both use the same asset list.

Common questions

Related guides

• Income-based valuation: capitalization and discounted cash flow, worked through
• Financing goodwill: how lenders underwrite intangible-heavy acquisitions
• Construction company valuation: WIP, backlog and bonding
• SBA collateral, life insurance and site visit requirements
• Commercial property appraisal in an SBA business acquisition
• Business valuation services: what you're actually buying

This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.