Standard of value
From Wikicpa
The user of a valuation report must know the standard of value used by the valuator in order to determine if the valuation conclusiton is appropriate for the user's intended purpose. There are four valuation standards often used my the valuator.
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The four standards of value
Fair market value
The most commonly used stanard of value is the fair market value (FMV). In general FMV is a legal concept used by courts to settle valuation disputes. FMV is not always the same as the "real world" price that an asset would be exchanged between a willing buyer and seller. FMV is often effected by circumstances unique to a buyer and seller, thereby resulting in their FMV being different than that of another buyer and seller.
From the perspective of a valuator, the FMV is more of an estimate of the probable selling price based on what an the average seller and average buyer may agree upon.
Fair value
Fair value, similar to FMV, is a legal concept and is used primarily in non-tax ligigation. The term "value" is may have a differenet meaning from any one state's statutes. The valuator must use the standard required by his or her state statue if the valuation is being prepared for litigation.
Investment value
Investment value usually refers to the value of a business to a specific buyer or seller. This approach follows the economic principle of substitution as defined below:
- The principle of substitution states that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable replacement property.
The investment value expresses a relationship amoung the amount of profit or income produced by the investment, the amount invested, and the expected rate of return of the investable amount. This standard is most often used in determining the value of an investment in a business to a specific and unique investor.
Intrinsic value
The intrinsic value of a business refers to the value derived on the basis of an analysis of the fundamental factors related to the business. Examining such factors as assets, liabilities and earnings, the valuation considers the "real" value in terms of actual historical results combined with future growth. This standard does not consider outside market varibles.
- The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often dificult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate [1]
Intrinsic value is sometimes used in shareholder disent lawsuits and matrimonial cases to determine the fair value of a business.
