Business Valuation Fundamentals and Professional Standards
Core concepts
Valuation is a forward-looking exercise grounded in a defined standard of value (fair market value, fair value, investment value, intrinsic value) and a defined premise of value (going concern vs. liquidation). Fair market value-the ASA/USPAP-style definition-assumes a hypothetical willing buyer and seller, both reasonably informed, neither under compulsion, and a reasonable exposure period. Every downstream choice (discounts, marketability, control) flows from the standard and premise, so a question that changes the standard changes the answer.
Know the professional architecture: USPAP governs appraisal practice and reporting; the AICPA Statement on Standards for Valuation Services (SSVS) governs CPA engagements and distinguishes valuation engagements from calculations of value and from consulting; NACVA and the ASA promulgate business valuation standards. Independence, objectivity, and adequate scope of work are recurring themes. Documentation, a signed engagement letter, and a defensible report are not optional.
Traps
- Confusing fair value (financial reporting, exit price, market participant assumptions) with fair market value (tax and many litigation contexts).
- Treating a calculation of value as a full valuation-it uses agreed-upon limited procedures and is not a conclusion of value.
- Ignoring the effective date; value is a point-in-time concept and post-date information may or may not be usable.
- Assuming a credentialed appraiser is required for every internal estimate-scope and intended use drive requirements.
Worked rule of thumb
If asked which standard applies to a federal estate tax filing, the answer is fair market value as defined in Treasury regulations (willing buyer/seller, no compulsion, reasonable knowledge). If the same company is valued for a purchase price allocation, switch to fair value under the accounting guidance. Same company, different standard, different conclusion.
Exam strategy
Anchor every question: identify standard, premise, effective date, and intended use before selecting an answer.