Business valuation can be defined as the process and the set of well laid procedures used to estimate the economic value of an owner’s equity in a business. Valuation is applied by financial market participants to establish the price they are ready to pay or accept to affect the sale of a business. In- addition to approximating the selling price of a business, the same valuation tools can be used by business appraisers to solve rows associated with, divorce litigation, estate and gift taxation, establishing a formula for estimating the value of partner’s’ ownership interest for buy-sell agreements, allocating business purchase price among business assets and several other business and legal purposes for instance in divorce litigation, shareholders deadlock and estate contest. In various cases the court can decide to appoint a forensic accountant as a unifying expert in doing the business valuation.
Standards and premise of value
Before the value of the business can be estimated, the valuation assignment must stipulate the grounds for and circumstances surrounding the business valuation. These requirements are officially referred to as the business standard and premise of value. The standard of value is the theoretical situation under which the business is going to be valued. The premise of value relates to the assumptions such as the postulation that the business will continue forever in its present form or that the value of the business can be determined by the proceeds from the sale of all its assets minus the related debt sum of the parts or collection of business assets.
Standards of Value
- Fair market value – this is the value of a business enterprise agreed upon between a willing seller and a willing buyer both in full awareness of all the applicable facts and neither forced to finish off a transaction.
- Investment value – this can be defined as the value the company has to a specific investor. Note that the impact of synergy is incorporated in the valuation under the investment standard of value.
- Intrinsic value –this is the evaluation of a business value that reflects the investor’s in-depth comprehension of the company’s economic potential.
Premises of Value
- Going Concern – this is the Value in the continuous use as a continuing operating business enterprise.
- Assemblage of assets – this is the value of assets available but not used to perform any business operations.
- Orderly disposition – this is the value of business assets in exchange where the assets are to be disposed individually and not used for any business operations.
- Liquidation – this is the value in exchange, when business assets are to be disposed of in forced liquidation.
Business valuation results vary significantly depending on the option of both the standard and premise of value. In a real business sale, it would be projected that the seller and buyer, each with an incentive to attain an optimal outcome, would decide the fair market value of a business asset that will compete in the market for such an acquirement. In case the synergies are precise to the company being valued, they might not be considered. Fair value also does not include discounts for lack of control or marketability.
However, it is possible to attain the fair market value for a business asset that is being liquidated in the secondary market. This underscores the disparity between the standard and premise of value.
These assumptions may not, and probably won’t reflect the definite conditions of the market in which the subject business will be sold. Nevertheless, these conditions are assumed because they capitulate a uniform standard of value after applying the generally conventional valuation techniques, which facilitates meaningful contrast between businesses which are similarly situated.
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