Standard of Value means the sign of the type of value being used in a specific engagement. Business interests are valued in a variety of contexts and for a variety of purposes. Different standards of value may lead to different conclusions of value. Therefore, it is most important for the value to identify a standard or definition of value pertinent to the valuation assignment.
Following is the Hierarchy of Standards of Valuation.
The most widely recognized and accepted standard of value is the Fair Market Value. It is the standard used in all Federal tax matters. It is defined in Revenue ruling 59-60 as the price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the seller is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts”.
There are several commonly used methods of valuation. Each valuation method may at times appear more theoretically justified in its use than others. The soundness of a particular method is entirely based on the relative circumstances involved in each case. The Valuation analyst responsible for selecting the most appropriate method must base his or her choice of methods on the application knowledge of the details of each case. The commonly used methods of valuation can be grouped into one of three general approaches as follows.
Asset-Based Approach Adjusted Net Asset Method. Fair Market Value Premise Replacement Cost Premise Liquidation Premise Going Concern Premise.
- Adjusted Net Asset Method.
- Fair Market Value Premise
- Replacement Cost Premise
- Liquidation Premise
- Going Concern Premise
- Public Company Data Method
- Dividend Paying Capacity
- Price/Earnings Ratio
- Price/Cash Flow
- Guidance/Comparable Company
- Price/Book value
- Capitalization of Earnings
- Excess Earnings/Treasury Method
- Excess Earnings/Reasonable Rate Method
- Discounted Earnings/Cash Flow
- Justification of Purchase
- Rules of Thumb
- Prior Sales if at Arm’s Length
- Transaction Database Methods
Other Valuation Methods
- Decision Trees
- Google Acquisition method
- Probability Weighted Expected Return Method
- Options Acquisition method
- Real Options Method
- Bayesian Analysis
- Binomial Analysis
- Monte Carlo Method
- Markov Chains
- Expected Commercial Value Method
- Market-to-Book Value method
- Conventional VC method
- First Chicago Valuation Method
- Competitive Advantage Valuation
- VC Internal Rate of Return Calculation
No valuation method is definitive, and all Valuation methods have appropriate uses. Valuation methods should be used in combination based on respective valuation assignments. The real value of applying various methodologies is applying them to value negotiations.
Levels Of Valuation Report
A Valuation Report must provide one of the following levels of service.
Comprehensive Valuation Report
Contains a conclusion as to the value of shares, assets, or an interest in a business based on a comprehensive review and analysis of the business, its industry, and all other relevant factors, adequately corroborated and set out in a detailed report.
This report provides the highest level of assurance concerning the value conclusion. It would be the equivalent of the Audit.
Estimate Valuation Report
Contains a conclusion as to the value of shares, assets, or an interest in a business Based on the limited review, analysis, and corroboration of relevant information Generally set out in a Valuation Report that is less detailed than the Comprehensive Valuation Report.
This report provides a lower level of assurance concerning the value conclusion. Equivalent to the Review Engagement.
Calculation Valuation Report
Contains a conclusion as to the value of shares, assets, or an interest in a business based on minimal review and analysis and little or no corroboration of relevant information. Generally set out in a brief Valuation Report. This type of report provides the least amount of assurance concerning the value conclusion. Equivalent to the Compilation Engagement.