4 Key Issues To Consider in Valuations – Part 1: Basis of Value

There are four key issues that must be considered when performing valuations on business entities.  Ignoring them (or confusing them) can make a valuation analysis less reliable, or, in the worst case, just downright wrong.

The first issue to consider is the basis of value.  The basis of value dictates the perspective with which a valuation specialist considers the entity being valued.  But what is the basis of value that is appropriate for the valuation analysis?

“Fair Market Value” generally applies in tax related analyses and family law matters.  Fair Market Value is typically based on IRS guidelines and case law (which can vary by state).

“Fair Value” can be the basis of value in litigation related analyses (including in the family law arena – see how it can get confusing?) and in financial reporting.  Fair Value is commonly based on case law (which can vary by state) and accounting regulations or guidelines.

Other bases of value include:

  • “Investment Value” (sometimes referred to as “Synergistic Value” or “Strategic Value”) reflects the value as it applies a specific buyer’s perspective and may include expected synergies (such as cost savings), benefits from strategic initiatives related to a transaction, or other special considerations.
  • “Intrinsic Value”  reflects the inherent value within a business entity.  This value typically is the value reflected by stock analysts who try to determine a stock’s intrinsic value compared to the market price.
  • “Liquidation Value”  reflects the value that could be achieved if a business entity faces a liquidation event, usually bankruptcy.  This value may include “fire sale” considerations.

The basis of value is a key issue to consider when a valuation specialist analyzes a business entity.  Applying the correct basis of value to your valuation need is an essential element of obtaining a reliable and appropriate valuation.  Our valuation specialists have experience considering each of these bases of value.  In future posts, we’ll explore the other three key issues that are essential to performing reliable and appropriate valuations.  In the meantime, if you have any questions about the basis of value that is appropriate for your valuation needs, please contact either Dan Branch or Marty Varon

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IAG Forensics

IAG Forensics & Valuation is a CPA firm that specializes in forensic accounting, fraud investigation, business valuation and litigation support.

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