Business valuation is a process and a set of procedures used to estimate the of an owner's interest in a business. Is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest. In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation. See also: Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation.
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A perfect guide for those who need to know more about the tricky business of valuation, Investment Valuation, Second Edition, will be a valuable asset for anyone learning about this critical part of the investment process.
These are formally known as the business value standard and premise of value. The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its current form (going concern), or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt (sum of the parts or assemblage of business assets). Standards of value [ ] • Fair market value – a value of a business enterprise determined between a willing buyer and a willing seller both in full knowledge of all the relevant facts and neither compelled to conclude a transaction. • Investment value – a value the company has to a particular investor. Note that the effect of synergy is included in valuation under the investment standard of value. • Intrinsic value – the measure of business value that reflects the investor's in-depth understanding of the company's economic potential.
Premises of value [ ] • Going Concern – Value in continued use as an ongoing operating business enterprise. • Assemblage of assets – value of assets in place but not used to conduct business operations. • Orderly disposition – value of business assets in exchange, where the assets are to be disposed of individually and not used for business operations.
• Liquidation – value in exchange when business assets are to be disposed of in a forced liquidation. Premise of value for fair value Calculation • In use – If the asset would provide maximum value to the market participants principally through its use in combination with other assets as a group.
• In Exchange – If the asset would provide maximum value to the market participants principally on a stand-alone basis. Business valuation results can vary considerably depending upon the choice of both the standard and premise of value.