Concepts of Value in Business Valuations

Value means different things to different people. A luxury car might be a status symbol to one person, a business tool to another, or a liability to someone else. Similarly, in business, the concept of value depends heavily on the context and the purpose of the valuation.

Whether you're selling a business, settling a family law matter, applying for finance, or assessing investment potential, the type of value being used must be clearly defined. Here's a breakdown of the common types of value used in business valuations and when each is most relevant.

Book Value

This is the value of an asset or liability as recorded on a company’s books. It represents historical cost minus any accumulated depreciation or amortisation. It doesn’t reflect current market conditions but may be useful for internal reporting.

Depreciated (Written Down) Value

Depreciated value reflects the asset’s cost minus depreciation. This is often used for tax or accounting purposes but rarely reflects the actual market or resale value of the asset.

Going Concern Value

This refers to the value of a business as an ongoing operation, assuming it continues to generate profits and is not being liquidated. Most business valuations are done on a going concern basis, especially where there's a profitable and sustainable future.

Liquidation Value

Used when a business is shutting down, this is the value realised from selling all assets quickly, often at public auction. It’s usually lower than market value due to the rushed nature of the sale.

Fire Sale Value

This is the value an asset would fetch in the shortest time possible, often in a distressed situation. The price obtained is usually significantly below market value due to urgency and lack of negotiation time.

Intrinsic Value

A theoretical value based on an asset’s fundamentals, including its historical performance and future earning potential. This is often used in investment analysis and may differ significantly from market price due to market perception or risk.

Fair Market Value

This is the most commonly used standard in business valuations. It is:

“The price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length.”

It assumes perfect information and no duress from either party. Regulatory factors (e.g., foreign investment rules) may influence this value.

Fair Value

This value is similar to fair market value but considers the identity and relationship between buyer and seller. It may include synergies and benefits specific to the transaction parties and is often used in legal disputes such as shareholder oppression cases.

Special, Investment or Strategic Value

This applies where a particular buyer may gain strategic benefits not available to others—such as vertical integration, cost savings, or exclusive technology. The price might be higher due to these unique advantages.

Value to the Owner

Common in family law valuations, this represents what the asset or business is worth to the specific owner, particularly in cases where the market doesn’t provide a ready valuation—like interests in discretionary trusts or minority stakes in private companies.

Conclusion

Understanding which type of value applies is crucial in any valuation. At Dolman Bateman, we specialise in providing valuations tailored to the specific context—whether it's for sale, litigation, tax compliance or family law.

If you're unsure what your business is really worth, or need a defensible valuation for court or negotiation, reach out to our team for expert guidance.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.