Business appraisal services don’t seem business value as a black and white issue, unfortunately. The valuation results often depend on the finder’s need for a valuation. In order to measure business worth and value, two factors can change this: how you decide to measure measure the business value and under what circumstances this is done. These are known as the standard of value and the premise of value. The business comps all depend on these two things so let’s look a little deeper at how this is done.
The Standard of Value
To go a little deeper in to the definition of this, the standard of value is basically any means by which people measure and communicate value. For example, when you put a price on an item of clothing, you are using gold as the standard of value. Gold was given the name dollar and soon this became the general standard of value. Previously, when everything was compared to a bushel of wheat, wheat was the standard of value. While market value is the most common standard used as far a small business valuations tools go, business comps often use investment value, insurable value, liquidation value and assessed value.
- Investment Value
This is what the business is worth to one specific buyer. It uses that buyer or investor’s assumptions and parameters to determine value. If the buyer is willing to pay more for the property or business, then it may result in a lower net return. Or, when a larger company buys out a smaller company or merges, certain tax credits may be available otherwise the cost of doing business may not justify the buyout.
- Insurable Value
This value method correlates directly to the cost of improvements. When you are estimating the insurable value of another business then you are taking in account how much would be covered by insurance in order to restore anything that has been damaged in the process.
- Liquidation Value
This is necessary to find out when the property requires immediate action. If the business is being sold or closed down than the liquidation value refers to how much it could be sold for according to its assets. It will generally be lower than the market value.
- Assessed Value
Business comps used the assessed value to determine a basis for being taxes. It typically related to the market value. Basically, the assessed value compares the tax charge to the market value.
- Going Concern
This is the premise that assumes that the business will keep functioning in it’s normal routine and will use it’s assets in order to make an income. This is typical when a company is bought out and begins to operate under new ownership.
- Assemblage of Assets
Business comps have the business assets brought in place but do not currently use them to make an income at this point. This usually occurs when business operations have been paused or right before a new start up business opens their doors.
- Orderly Disposition
Here, business assets are no longer thought of as income opportunity. Usually, at this point, the assets are sold individually to the highest bidder.
- Forced Liquidation
In this scenario, the assets are not used for income either and are sold just like the orderly disposition premise.However, the idea here is not to sell to the highest bidder but to the first offer available.
The Premise of Value
The value of a business really does depend on the situation in which the business is valuated. Basically, the value can change depending on what the seller thinks will happen to the company in the future. For example, if a particular business is sold and continues under new management compared to if the business is shut down and its assets sold at auction will change what the business is worth. The main premises of value that are used are going concern, assemblage of assets, orderly disposition and forced liquidation.
Business valuation analysis can be a complicated thing purely because there are so many variables. Then, if the particular investor or seller is not happy with the results that they have gotten from the valuation firms, then it’s likely that they will start the whole process again to see if they can drum up better results that are more in their favor.
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