1. Meet with the client and his or her advisors to discuss the
purpose of the valuation
2.
Standards of Value
There are five standards of value used in
the business valuation profession. The purpose of the valuation will
determine the appropriate standard to use. Using an incorrect standard
of value can cause a significant distortion of a company's value for the
purpose needed. Standards of value include:
Fair Market Value
– IRS Revenue Ruling
59‑60 defines the term fair market value as "the price at which property
would change hands between a willing buyer and a willing seller, when
the former is not under any compulsion to buy and the latter is not
under any compulsion to sell, both parties having reasonable knowledge
of relevant facts. Court decisions frequently state, in addition, that
the hypothetical buyer and seller are assumed to be able, as well as
willing, to trade and to be well informed about the property and
concerning the market for such property."
Investment Value
– The International Glossary
defines investment value as "The value to a particular investor based on
individual investment requirements and expectations."
Intrinsic Value
– Intrinsic value is based on
the fundamental analysis of a company. Jeffery C. Hook, in his text
Security Analysis on Wall Street: A Comprehensive Guide to Today's
Valuation Methods, states that "Under the intrinsic value method,
future dividends are derived from earnings forecasts and then discounted
to present value, thereby establishing a present value for the stock."
Fair Value (State Rights)
– Fair Value is defined by the
Uniform Business Corporations Act as "the value of the shares
immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action." Fair value is often used in
dissenting right cases and shareholder oppression cases and its
application can vary from state to state.
Fair Value (Financial Reporting)
– SFAS 141 and 142 define fair value as "The amount at which an asset
(or liability) could be bought (or incurred) or sold (or settled) in a
current transaction between willing parties, that is, other than in a
forced or liquidation sale".
