There are a few options when it comes to valuing a company with no revenue. The most common methods if the company is not a startup but has no revenue are:
- Net Asset Value or
- Net Book Value
Note that some books / instructors will say that the net asset value is essentially the same as net book value. I’ll get into more detail below.
If the company with no revenue is a startup; i.e. it is a pre-revenue company, then other valuation methods are used. If that’s what you’re looking for, you can read about that here.
How To Value A Company With No Revenue
As mentioned in the intro, net asset value (NAV) is synonymous with net book value (NBV) in many cases.
From my professional experience, NAV and NBV are similar in that they both consider the value of the company’s assets as the value of the company.
But the difference is that NBV only looks at the balance sheet whereas NAV also considers what the going rate is in the market outside of the balance sheet.
Net Book Value vs Net Asset Value
For example, let’s say a company has no revenue and the only asset the company has is one heavy piece of equipment. Let’s say that this equipment is recorded on the balance sheet as $10 million (net of accumulated depreciation).
For simplicity purposes, we’d say that the net book value of this company is $10 million.
But let’s say that according to a 3rd party expert, this machine could be sold in the market for $15 million. Then, the “fair value adjustment” to this equipment is $5 million.
The net book value of $10 million is adjusted by $5 million, and thus the net asset value is then $15 million.
The above is a really simplified example. Let’s take a look at a slightly more detailed example below.
How To Value A Company With No Revenue Using Net Book Value
To reiterate, when a company has no revenue, the net book value (NBV) can be used to value the company’s assets on the books (i.e. balance sheet).
Net Book Value is calculated as the total assets minus the total liabilities on the balance sheet.
In the example of Company XYZ’s balance sheet below, the net book value is the total assets of $60,560 minus $25,794 of total liabilities, which gives you the NBV of $34,766.
As you look down the balance sheet from top to bottom, have a look at each item and how that contributes to the book value.
Cash, investments, accounts receivables, property, plant and equipment are all assets to the company that has value. (Note that that property, plant & equipment is net of accumulated depreciation.)
And then as you move into the liabilities section, accounts payable, long-term debt and other liabilities all are how much the company owes.
So, when a company has no revenue, this method works as a way to value the company, because you can think about it as what the value of the company would be when you liquidate everything.
How To Value A Company With No Revenue Using Net Asset Value
This brings us to the net asset value. As mentioned just above, to value a company with no revenue, you can think about what the assets are worth after paying off all the liabilities as though the company was liquiding (aka dissolving).
Cash on the balance sheet is worth whatever is stated on the balance sheet, but some items on the balance sheet are stale and the value of those individual items will be different if you were to liquidate them in the market.
For example, net property, plant, and equipment might be for a heavy piece of equipment or land or buildings that the company owns.
At the time of purchase of the building, land or equipment, the amount is recorded on the balance sheet. Every year, some amount is depreciated.
After several years, the net PPE amount on the balance sheet is the amount initially recorded minus the amount that’s been depreciated over time.
But this follows an accounting calculation. Perhaps the building is in a fantastic location so the company can sell it for much higher than what’s currently on the balance sheet.
Or perhaps the equipment is viewed as obsolete in the market, because there has been rapid technological advancement in the industry.
That’s why in this case, net asset value is considered as opposed to the net book value, since NBV is calculated just from what’s on the balance sheet, whereas NAV considers the market value.
You can hire a 3rd party appraiser to appraise the equipment, building, or land. Or, you can look up how much comparable equipment sells for or how much similar buildings have been sold for to see what the market value would be.
Then, you make these adjustments to calculate the “fair market value”. When you add up the new fair market value adjusted assets on the balance sheet and subtract by the total liabilities, you get the net asset value.
Let’s continue with the example above and look at what happens when certain items are adjusted for how much the assets would sell for in the market:
In this example, a 3rd party appraiser was hired to give a fair market value estimate on the net property, plant and equipment.
And it was deemed that the PPE can be sold at a higher price tag than what’s recorded on the balance sheet.
As a result, the NAV is higher at $64,118 vs NBV of $34,766.
Summary
To wrap-up, when an established company (that is not a startup) has no revenue, you can value the company using net book value or net asset value.
Net book value refers to using only the balance sheet to calculate the total assets minus the liabilities.
Net asset value uses the market value; i.e. how much can you get for all the assets if you sold them in the market today.
Depending on the industry, the company’s main asset(s) can be valued in the market by a 3rd party appraiser, using comparables, or by forecasting the future cash flows.
Lastly, I want to mention that NBV or NAV is often used to triangulate the valuation of a company by using it as one of the methods among others, such as Discounted Cash Flow method and Comparables.
Unless the company has no revenue, NBV or NAV is rarely used on its own as a valuation method.
But when the company has no revenue and other valuation methods can’t be used, NBV or NAV is a great method to value the company.
