Premise of Business Value
The key assumption that reflects the set of circumstances surrounding the business valuation.
What It Means
Determining the business value depends upon the situation in which the business is valued. Put differently, what is likely to happen to the business beyond the valuation date makes a difference to what we think the business is worth.
Consider a business that is for sale and will continue operating under the new ownership. Compare this to a business that will be shut down and its assets sold at an auction. Clearly, the value of the business under these very different circumstances will be quite different.
Here are the main premises of value used by experts:
- Value in continued use, as a going concern.
- Value in place, as an assemblage of assets.
- Value in exchange, as an orderly disposition.
- Value in exchange, as a forced liquidation.
Note that the same definition or standard of business value can apply to different valuation situations and, therefore, different premises of value. For example, the business buyer and business seller may bargain to establish the fair market value but conclude the transaction either on a going concern or orderly disposition basis.