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Valuation Basics

Business Valuation: A Strategic Approach to Economic Value

Business valuation is a critical process that determines the economic worth of an owner’s interest in a company. This process uses advanced valuation techniques and methodologies employed by financial experts to establish a fair and accurate price for business transactions, including sales and acquisitions.
Valuation Basics
01

Purpose and Applications of Business Valuation

Business appraisal tools serve multiple functions beyond sales, such as resolving legal matters including estate and gift taxation, divorce settlements, partner ownership disputes, and buy-sell agreement formulations. Certified professionals like Chartered Business Valuators (CBVs), American Society of Appraisers (ASA) members, and Certified Valuators and Analysts (CVA, CBA) provide expert valuation services. In certain cases, forensic accountants may be appointed by courts to prepare valuation reports that withstand rigorous legal scrutiny.
Valuation Standards

Standards and Premises of Value

Valuation accuracy depends on clearly defining the purpose and circumstances, including the chosen standard and premise of value.
  • Fair Market Value – The estimated price in an arm’s-length transaction between knowledgeable, willing parties.
  • Investment Value – Valuation reflecting the specific value to a particular investor, considering unique synergies.
  • Intrinsic Value – The business’s value based on detailed analysis of its economic potential.
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Valuation Basics
02

Distinguishing Business Valuation and Stock Valuation

It is essential to differentiate business valuation from stock valuation. While stock valuation primarily assesses listed companies’ stock prices for investment trading, business valuation encompasses the entire enterprise’s value as a going concern. Business valuation offers a comprehensive assessment of an entity’s market worth beyond stock price fluctuations.
Valuation Standards

Premises of Value

  • Going Concern – The ongoing operational value of the business.
  • Assemblage of Assets – Valuation of assets without consideration of active business operations.
  • Orderly Disposition – The orderly sale value of assets individually.
  • Liquidation – Forced liquidation value under distressed conditions.
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Valuation Insight

Impact of Valuation Standards on Outcomes

The selection of appropriate standards and premises profoundly impacts valuation outcomes.
Typically, fair market value in a competitive market is the reference point for business sales,
excluding discounts related to control or marketability.
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