Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business.
In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contestill In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.
Premises of Value:
- Going Concern: Value in continued use as an ongoing operating business enterprise.
- Assemblage of assets — value of assets in place but not used to conduct business operations.
- Orderly disposition: — value of business assets in exchange, where the assets are to be disposed of individually and not used for business operations.
- Liquidation: — value in exchange when business assets are to be disposed of in a forced liquidation.
Premise of Value for Fair Value Calculation
- In use — If the asset would provide maximum value to the market participants principally through its use in combination with other assets as a group.
- In Exchange — If the asset would provide maximum value to the market participants principally on a stand-alone basis.
Standards of Value
- Fair market value — a value of a business enterprise determined between a willing buyer and a willing seller both in full knowledge of all the relevant facts and neither compelled to conclude a transaction.