Important aspects of a business valuation service
Before a business valuation service commences, it is important to establish its main aspect – the purpose. Is the valuation service transaction-driven – to establish the business value for a buyer, seller, investor? Is it litigation-driven – for divorce or shareholder dispute purposes? Is it tax-driven – for CGT or related parties’ transaction purposes? Will it be used for accounting and financial reporting? Based on this, the following important aspects of the business valuation service are to be further discussed, outlined and used as the basis of the valuation analysis:
Standard of Value
Standard of Value defines the type of value being assessed in the valuation engagement; this can be fair market value, fair value, investment value, intrinsic value or liquidation value. Different standards of value generate different business values. For example, fair market value and investment value of the same business can sometimes differ significantly. This is because the price at which a property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts (fair market value) is not the same as its value to a particular investor based on the individual investment requirements and expectations (investment value).
Premise of Value
Premise of Value defines the most likely set of transactional circumstances that may be applicable to the subject valuation; e.g., going concern, strategic acquisition, liquidation. It should be linked to the concept of highest and best use of the subject business – assuming a course of action which would return the greatest value to a hypothetical willing buyer.
Level of Value
Level of Value defines the level of control a business owner has (control or minority interest) and how readily can the business interest be converted to cash (marketable or nonmarketable basis). Different levels of value generate different business values. For example, a control value will be higher than a minority value (on a pro rata basis) as the ability to control the business’ decisions is worth more for potential buyers of the business. Likewise, shares in marketable businesses (public companies) are worth more than shares in nonmarketable businesses (private companies) as they are readily convertible to cash.
By Julia Podgorbunskaya, CPA, Senior Business Valuer at Professional Business Valuers
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