Business Valuation - What is "Premise of Value"?
One of the first tasks before a valuation engagement begins is knowing what Premise of Value to use. This is described as what is the highest and best use of the business.
The two key distinctions to consider for a business are whether the business should be valued as a going concern (i.e. continue to operate in business) or if in liquidation (i.e., the business is worth more dead than alive). The highest and best use concept is to determine which premise would provide the maximum value.
The going concern value is the value of a business that is expected to continue operating into the future. This value is derived from the business having the ability to earn profits, which often leads to a value above liquidation value.
The liquidation value is defined as the net amount expected to be left over after the assets are sold off and the proceeds are used to satisfy existing liabilities. This can be further split into orderly liquidation and forced liquidation, which have their own unique considerations. The important point is to understand how liquidation values applies within the concept of highest and best use.
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Disclaimer: The information contained in this article is for general guidance only. The information presented should not be acted upon without the advice and guidance of a professional tax, legal, or financial adviser who is familiar with all the relevant facts.