Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. It is a general process of determining the economic value of a whole business or company unit. Valuation is used by financial market participants to determine the price they are willing to pay or receive to affect the 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 the 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. It can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.
The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business. It is frequently discussed in corporate finance. It is a way to determine the economic value of a company, which could be useful in several situations. Valuation is also important for tax reporting.
Standards of value
- Fair market value – Fair market value (FMV) is the price agreed between a buyer and a seller for a specific asset. It is 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. It is the price that a willing buyer will pay to an unrelated but willing seller.
- Investment value – Investment value is the amount of money an investor would pay for a property. It is a value the company has to a particular investor. Note that the effect of synergy is included in valuation under the investment standard of value.
- Intrinsic Value – Intrinsic value is a measure of what an asset is worth. It is the measure of business value that reflects the investor’s in-depth understanding of the company’s economic potential.