We are transitioning our asset-heavy manufacturing business to a digital-first distribution model. The buyer is focusing on the liquidation value of our old machinery rather than our new digital cash flows. How do we force them to use the Gross Substantial Value or Income Approach?

Question

Tyler Smith · Accepted Answer

If a buyer tries to anchor your valuation to the liquidation value of your physical assets, they are ignoring the future economic benefits of your business model. Liquidation value is only relevant in a wind-down scenario. For a going concern, especially one transitioning to a digital-first model, you must force them to evaluate the company using the income or market approaches.

Under IVS 105, the income approach is the most appropriate method when future cash flows are expected to differ significantly from historical asset values. Present a detailed projection of your digital distribution margins, which are likely much higher than your traditional manufacturing margins. Show them how your custom software integrations and direct-to-consumer pipelines generate highly efficient, scalable revenue.

You should also calculate your Gross Substantial Value, which represents the total market price of your operational assets, including your intangible digital systems and customer databases. When you demonstrate that your digital infrastructure produces superior cash flows compared to your physical machinery, you prove that valuing the company on physical book value is fundamentally flawed. Use your data to shift the conversation to your future earnings potential.