Business Valuations Sydney : Services provided by Xcllusive Business Agency
Standards of Business Valuation
Various standards may produce different valuations. It is important to use the right approach
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The term ‘Valuation Standards’ refers to the various classes that a business valuation can adhere to. The various standards may produce very different answers for the same business so the valuer needs to establish the appropriate standard for the specific engagement. Sometimes standards may be nominated or mandated, other times it may be a function of the wishes of the parties involved. The following is a brief description of the valuation standards.
1. Fair Market Value
Of all the standards, Fair Market Value is by far the most commonly used standard of value.
Fair Market Value is the estimated amount that a business will sell for
between a willing buyer and a willing seller on the given date on the
open market. Fair Market Value also assumes that both parties involved
hold a reasonable level of knowledge regarding the relevant facts. The
valuer is also required to make a number of assumptions as to the
buyers/sellers behaviour and to the terms and conditions associated with
the hypothetical transaction. Essentially, Fair Market Value does not
take into account the individual circumstances of the buyer and the
seller.
2. Fair Value
The primary difference between
Fair Market Value, and Fair Value is that Fair Value relies very heavily
on individual circumstances. For Fair Value to be established, both the
seller and the buyer must have already been identified, and as such,
the resultant value represents a figure beneficial and fair to both
parties. Essentially it takes into account what the seller gives up in
value and what the buyer acquires in value through the transaction.
Being that this type of Valuation is a closed market value, the various
influences introduced by an open market sale (financial, legal,
operational, personnel, ownership, cultural etc) are eliminated.
3. Book Value
Refers to the depreciated market
value of the fixed assets. These may include premises, plant and
equipment, vehicles etc. This standard of Valuation is considerably less
common than Fair Market Value, and Fair Value as it doesn’t take into
account intangible assets.
4. Asset Based Value
Though disregarding
intangible assets in a similar fashion to Book Value, Asset Based Value
ignores the book value and assigns value according to the potential
resale of the physical assets in an orderly fashion.
5. Liquidation Value
Liquidation value is
assigned to businesses that are no longer a going-concern. Value is
established by the value of the terminated business, with focus on the
value of its fixed assets, net of its liabilities and the inevitable
costs generated by discontinuing operations. Though assets can be sold
off in an orderly fashion, being that the context is liquidation, the
haste of which assets can be sold off is generally taken into account.
6. Firesale Value
The price at which assets can be sold in the shortest possible time, regardless of how low the obtained price is.
7. Investment Value
Investment Value is
comparable to Fair Value in that it is involved in Valuations for a
Closed Market Sale. It is specific to an instance where the
incorporation of the sellers company into the buyers company represents
perceived synergies.