DIFFERENT VALUES FOR DIFFERENT PURPOSES
It's been but two weeks since the 2016 1099s, W-2s and other tax documents started filling your mailbox. As we at Abo and Company have started addressing the tax issues and return preparation this time of year throws at us, requests for our valuation expertise never seems to "take a break" (and that be a good thing!).
But what do they mean when they ask Abo Cipolla Financial Forensics for "the value"? Well, value is a worthless term by itself because it can mean so many different things. A value found for one purpose can be entirely different from the value for another. Understanding exactly what type of value you are looking for can make the information you obtain from the valuation much more useful. Here's a look at some of the many kinds of value:
Value: A useless word by itself.
Book value: Not a standard of value at all. Book value is an accounting term for the total net assets minus total liabilities on the balance sheet. Intangible assets are usually excluded from book value.
Fair market value: Fair market value is defined as, "The price at which the 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." This definition and the standards for fair market value were set by the Internal Revenue Service in Revenue Ruling 59-60. The definition suggests that fair market value cannot result from purely subjective factors such as sentimental value. It also cannot result from a forced sale, or one resulting from an unusual or rigged market. It is used for federal and state tax matters, including gift, estate, income and inheritance taxes.
Fair value: Statutory standard of value usually used in court cases involving dissenting shareholders' litigation. Court precedent in most states has not equated fair value with fair market value, but the courts have reached little other consensus on its meaning. In real estate appraisals, on the other hand, fair value is often used synonymously with fair market value.
Liquidation value: Liquidation value is the value derived from the piecemeal sale of assets. The sale can be orderly or forced, which can affect the value. Liquidation value is typically at the low end of the value spectrum.
Intrinsic value: Subjective value of an entity to an owner/buyer. Intrinsic value may exclude current market influences. It also may include consideration of such things as the company's assets, and its likely future earnings, dividends and growth rate.
Investment value: Value to a particular buyer or investor considering his or her specific personal circumstances, knowledge of the transaction and potential synergies. This value can be higher or lower than the company's fair market value.
Enterprise value: Value of 100% of the shareholders' equity on a control basis.
Invested capital value: Fair market value of 100% of the equity plus the market value of long-term debt.
Minority value: Value reflecting an ownership position of less than 50%.
Control value: Additional value inherent in a legally controlling interest, reflecting the power of control over the business.
Marketable value: Value of an equity assuming a pre-established market in which that equity can be exchanged.
Private company value: Opposite of marketable value. Private company value represents a decreased value due to the limitations in the equity's marketability.
Choosing the Wrong Value May Be Costly
It's important to know what base type of value (i.e., minority, marketable) you're starting with before any discounts or premiums are applied. Relying on the wrong type of value may be quite an expensive mistake. Understanding the differences between standards of value can help you interpret their relative worth in your situation.
In case you were wondering what the credentials after CPA stood for in Marty Abo's title, ABV stands for Accredited in Business Valuation while CVA stands for Certified Valuation Analyst.