The Asset-Based Approach When the Balance Sheet Is the Business

The method is directionally right but incomplete and internally inconsistent.

What it gets right: adjusting assets from depreciated cost to fair value is the core of the asset-based approach for a holding company.

What it omits or gets wrong:

1. Deferred tax liability ($900K). If the properties are sold at appraised value, the built-in gain triggers tax. The DTL is a real liability that reduces net asset value. The owner's math ignores it. (Whether to include it depends on the premise - if the entity is a going concern held indefinitely, some analysts use a reduced or zero DTL; if liquidation or sale is contemplated, include it. State the premise.)
2. The note receivable ($400K at 2% vs. 6% market). It must be discounted to present value at the market rate. The discount depends on remaining term; if, say, 5 years remain, PV ≈ $400K × (annuity factor at 6%) - materially below face. The owner carries it at face.
3. Goodwill ($250K). Book goodwill from a 2012 acquisition is an accounting artifact. It has no independent fair value; it should be removed unless the management operation's earnings support an intangible value (which would then be captured in the operating-business valuation, not as book goodwill).
4. The management operation. A $300K-EBITDA business is a going concern with value beyond its net assets. The asset-based approach alone will understate it; you need an income or market approach for the operating segment and add it to the real-estate NAV.
5. Property C is worth less than book ($1.6M vs. $1.8M) - the owner did capture this, correctly.

Corrected NAV (real estate only, illustrative): $7.3M + $3.1M + $1.6M = $12.0M, less DTL $0.9M, plus adjusted note receivable, plus operating-business value, minus other liabilities.

Why separate: The real-estate NAV captures the properties at fair value. The management operation is a separate going concern - it earns fees (presumably from managing these and possibly third-party properties) and has its own earnings stream, customer relationships, and workforce. Folding $300K EBITDA into the real-estate NAV would either double-count (if the fees are already embedded in property cash flows) or omit it (if third-party fees are separate). First determine whether the management fees are intra-group (paid by the owned properties) or third-party. If intra-group, they are eliminated in consolidation and the operation has little standalone value. If third-party, they are a real earnings stream.

Valuation: Capitalize or discount the $300K EBITDA using a market multiple for property-management firms (typically low-to-mid single digits given the fee-based, people-dependent nature) or a DCF. Say 6x → ~$1.8M enterprise value, adjusted for any debt.

Then add: Real-estate NAV (adjusted) + operating-business value = total equity value. Present the two components separately so the reader sees the composition.

Standard of value: Fair market value? Fair value? Investment value? The treatment of the DTL and the note depends on it. FMV assumes a hypothetical willing buyer/seller - a buyer would price in the tax leakage on appreciated property, supporting the DTL. Investment value to the current owner (who may hold indefinitely) could support a reduced DTL.

Premise of value:

• Going concern - the entity continues; DTL may be deferred indefinitely; note is held to maturity.
• Liquidation / orderly sale - properties sold, taxes triggered, DTL fully recognized.
• Orderly vs. forced - affects real-estate values.

The owner's implicit premise is going concern but the math ignores the DTL, which is inconsistent: if you mark properties to fair value (a sale-like assumption), you should also recognize the tax consequence. Pick a premise and apply it consistently to both sides of the balance sheet.

Also: the $400K related-party note raises an independence/related-party disclosure issue. Document the terms, the market-rate comparison, and the discounting methodology.