Business Valuation: Foundations, Purpose, and the Engagement
Business valuation is the process of estimating the economic worth of an ownership interest or enterprise as of a defined valuation date. Every answer begins with the standard of value: fair market value (hypothetical willing buyer and seller, neither compelled, both informed), fair value (a legal/accounting term whose meaning depends on the context, e.g., dissenting-shareholder statutes versus financial reporting), investment value (buyer-specific synergies), and intrinsic value (analyst's perceived worth). Confusing fair market value with fair value is the most common trap.
Next identify the premise of value-going concern versus orderly or forced liquidation-and the subject interest: enterprise value, equity value, or a partial ownership interest. Enterprise value plus non-operating assets minus interest-bearing debt bridges to equity value; questions often test whether a control premium or a marketability discount applies to the interest actually being valued.
Valuation date matters: value is a snapshot, so post-date information should not be used unless it illuminates conditions known or knowable at that date.
The engagement itself is governed by scope and standards. The scope of work (valuation vs. calculation vs. consulting conclusion) and the applicable standards (USPAP, AICPA SSVS, IVS) drive reporting and documentation obligations. Independence, competence, and a written engagement agreement describing purpose, intended use, standard and premise of value, and assumptions are foundational.
Rule of thumb: write the standard of value, premise of value, subject interest, and valuation date in one sentence before touching any method-every downstream choice must be consistent with that sentence.