Break-up Value Approach
An asset-based valuation that measures what a company would fetch if it were shut down on the valuation date and sold in pieces — liquidation value of assets less settlement value of debt.
In plain language
A company that has no future is worth what its parts would sell for. The break-up value approach puts a number on that.
The workbook describes it as the third asset-based method: it "considers the salvage value of a business if it were shut down on the valuation date". It measures "the current market value of the company if it is broken up and sold in individual pieces of assets". That is why it is used "to value a company that is in distress or does not have a future business case".
It is the opposite end of the scale from book value. Book value per share is normally considered the "floor price" for a business that is expected to continue as a going concern. Break-up value asks what is left if it does not continue — and the answer is usually a good deal lower.
How it works
The formula (section 11.5):
Break-up Value per Share = (Liquidation Value of Assets − Settlement Value of Debt)
/ No. of equity shares issued and paid up
The workbook's sample question makes the same point in one line: break-up value of a share is arrived at using assets and liabilities at liquidation value.
The workbook's computation (Illustration 11.4, Alpha Ltd, 10,000 shares):
| Step | Rs |
|---|---|
| Tangible net worth (from the book value computation) | 1,01,00,000 |
| Add: stock 10% higher (Rs 3.5 lakh), intangibles fetch Rs 5 lakh more, payables settle 15% lower (Rs 1.5 lakh) | 10,00,000 |
| Less: fixed assets fetch only 40% of book on scrapping (loss of Rs 72 lakh on Rs 1.2 crore), receivables fetch 25% less (Rs 6.25 lakh on Rs 25 lakh) | 78,25,000 |
| Break-up value of business (Equity Value) | 32,75,000 |
| Break-up value per share | Rs 327.50 |
Against a book value of Rs 1,010 per share, break-up value is less than a third. Most of the gap is the fixed assets: a plant that is worth its book value to a running business is worth scrap to a buyer of parts.
Where it sits among the methods. Asset-based valuation is not considered an independent method and is usually combined with other methods with appropriate weightage. It is most appropriate for asset-heavy businesses and distressed companies facing liquidation, and ideal for financial businesses. The revaluation reserve is excluded from net worth before any of this starts.
A worked example
Illustrative figures. A special situation fund is looking at the equity of Surat Polyfab Ltd, a textile processor that has stopped operations. It has 50 lakh shares.
| Item | Book value, Rs crore | Liquidation assumption | Liquidation value, Rs crore |
|---|---|---|---|
| Plant and machinery | 40.0 | 35% of book | 14.0 |
| Land | 12.0 | 150% of book | 18.0 |
| Inventory | 8.0 | 60% of book | 4.8 |
| Receivables | 10.0 | 70% of book | 7.0 |
| Assets | 70.0 | 43.8 | |
| Bank debt | 36.0 | settled at 100% | 36.0 |
Break-up value = 43.8 − 36.0 = Rs 7.8 crore
Break-up value per share = 7.8 crore / 50 lakh shares = Rs 15.60
Book net worth would have been 70 − 36 = Rs 34 crore, or Rs 68 per share. The fund's decision is not whether Rs 68 is fair — for a company with no business case, it is not — but whether it can buy below Rs 15.60 and what it can do with the land.
The same logic appears in the exit chapter: a corporate liquidation is the least preferred exit and "would only provide salvage value if any" to the AIF.
Why NISM asks about it
Chapter 11 (Valuation) defines the three asset-based approaches at 11.5, gives the break-up formula, and works it in Illustration 11.4; the chapter's sample questions ask directly which basis break-up value uses. Chapter 10 (Fund Monitoring, Reporting and Exit) describes corporate liquidation as the worst-case exit giving only salvage value. Expect the formula, a per-share computation, and "when is this method appropriate".
Common exam traps
- Break-up uses liquidation values of assets and settlement values of liabilities — not book values (that is NAV) and not going-concern replacement costs (that is the replacement approach).
- Payables can go up in value to the company when they settle at a discount — in Alpha Ltd, payables 15% lower on liquidation is an addition of Rs 1.5 lakh.
- Book value is the floor for a going concern; break-up value is for a company without a future. Do not treat book value as a floor for a distressed company.
- The revaluation reserve is excluded from the net worth the computation starts from.
- Arithmetic inconsistency in Illustration 11.4: the book value table shows "Total Cash net worth 1,00,00,000" although its components (Rs 1 lakh capital, Rs 50 lakh general reserve, Rs 25 lakh CRR, Rs 20 lakh DRR, Rs 5 lakh P&L surplus) add up to Rs 1,01,00,000, which is the figure carried forward as tangible net worth and used for the Rs 1,010 per share and the break-up computation. Use Rs 1,01,00,000.
Where this is taught
- Series XIX-A · Chapter 11: Valuationintroduced here
- Series XIX-C · Chapter 14: Valuationintroduced here
- Series XIX-D · Chapter 11: Valuationintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Equity ValueThe value of 100% of a company's shares — what belongs to equity shareholders after debt and preference capital are deducted from enterprise value. For a listed company, its market capitalisation.
- Replacement Cost ApproachAn asset-based valuation that values a business at what it would cost to replace it as it stands today, including set-up costs — suited to businesses with high entry barriers or setting-up costs.
- Special Situation FundA sub-category of Category I AIF that invests only in special situation assets — stressed loans, security receipts and the securities of defaulting companies — and may act as a resolution applicant under the IBC.
- Corporate liquidation exitThe least preferred, worst-case way for an AIF to exit a portfolio company: a long statutory process that returns only salvage value, if any, unless preference rights or debt give priority.
- Book value per shareEquity shareholders' funds as per the balance sheet divided by the number of equity shares issued and paid up — normally treated as the floor value of a going-concern business.
- Book Value approachThe first of the three asset-based valuation methods: value the company at the historical carrying cost of its assets and liabilities, giving a book value per share treated as the floor price.
- Special Situation AssetAn asset a special situation fund may invest in: stressed loans, ARC security receipts, and securities of companies whose loans are stressed, under IBC resolution or in continuing default.