upgrade
upgrade

💹Business Valuation

Types of Business Value

Study smarter with Fiveable

Get study guides, practice questions, and cheatsheets for all your subjects. Join 500,000+ students with a 96% pass rate.

Get Started

Why This Matters

In business valuation, the number you arrive at depends entirely on which type of value you're measuring—and that choice depends on the purpose of the valuation. A company being sold to a strategic acquirer, valued for tax purposes, or assessed in bankruptcy will yield dramatically different figures, even though it's the same business. You're being tested on your ability to match the right value standard to the right context and explain why that standard applies.

Understanding these distinctions matters because exam questions often present scenarios where you must identify the appropriate value type, calculate it, or explain why two parties might disagree on a company's worth. Don't just memorize definitions—know what assumptions underlie each value type, when each is used, and how they relate to one another. Master the logic behind each standard, and you'll handle any FRQ or case study with confidence.


Market-Based Value Standards

These value types rely on what buyers and sellers would actually pay in real-world transactions. They're grounded in market dynamics and assume some level of competitive, arm's-length negotiation.

Fair Market Value

  • The hypothetical price between willing parties—assumes both buyer and seller are reasonably informed, acting in their own interest, and under no compulsion to transact
  • Standard of value for most legal and tax purposes, including IRS requirements for estate taxes, gift taxes, and charitable contributions
  • Assumes a "typical" buyer, meaning it excludes any special advantages a specific purchaser might gain from the acquisition

Market Value

  • The actual price observable in current market conditions—what an asset or business trades for right now based on supply and demand
  • Heavily influenced by investor sentiment, meaning it can deviate significantly from fundamental value during market euphoria or panic
  • Primary benchmark for public companies, where stock price multiplied by shares outstanding gives market capitalization

Compare: Fair Market Value vs. Market Value—both reference what buyers would pay, but FMV is a hypothetical standard assuming rational parties, while market value reflects actual prices that may include irrational behavior. If an exam asks about valuing a private company for tax purposes, FMV is your answer; for a publicly traded stock's current worth, use market value.


Investor-Specific Value Standards

These value types recognize that the same business can be worth different amounts to different buyers, depending on their unique circumstances, expectations, or strategic position.

Investment Value

  • Value to a particular investor based on their specific required return, tax situation, financing terms, or portfolio strategy
  • Often higher or lower than fair market value because it incorporates the investor's unique assumptions rather than market-wide expectations
  • Key concept in negotiation—a deal happens when the seller's minimum price falls below the buyer's investment value

Synergistic Value

  • The premium created by combining two businesses—represents value that exists only because of the merger, not in either company alone
  • Sources include cost synergies (eliminating duplicate functions), revenue synergies (cross-selling opportunities), and financial synergies (lower cost of capital)
  • Critical for strategic acquirers, who can justify paying above fair market value because they'll capture synergies a financial buyer cannot

Compare: Investment Value vs. Synergistic Value—both are buyer-specific, but investment value reflects an individual investor's circumstances, while synergistic value specifically measures the additional worth created by combining operations. On an FRQ about M&A premiums, synergistic value explains why acquirers pay above market price.


Fundamental Analysis Standards

These value types attempt to measure what a business is "really" worth based on its underlying economics, independent of current market prices or specific buyer perspectives.

Intrinsic Value

  • The "true" worth based on fundamentals—calculated through discounted cash flow analysis, asset valuation, or other methods that estimate economic reality
  • Central to value investing philosophy, where investors seek stocks trading below intrinsic value (undervalued) and avoid those trading above (overvalued)
  • Requires assumptions about growth, risk, and discount rates, meaning two analysts can calculate different intrinsic values for the same company

Going Concern Value

  • Value assuming continued operations—captures the worth of an operating business with its customer relationships, trained workforce, and established systems intact
  • Includes intangible value that would be lost if the business ceased operations, such as brand recognition and supplier relationships
  • The default assumption for most valuations, unless there's evidence the company faces imminent closure or distress

Compare: Intrinsic Value vs. Going Concern Value—intrinsic value is an analytical output from fundamental analysis, while going concern value is an assumption that the business continues operating. A DCF model calculating intrinsic value typically assumes going concern status unless you're explicitly valuing a distressed company.


Accounting and Asset-Based Standards

These value types focus on what's recorded on financial statements or what assets could fetch if sold, providing concrete but sometimes limited perspectives on worth.

Book Value

  • Assets minus liabilities per the balance sheet—calculated as Book Value=Total AssetsTotal Liabilities\text{Book Value} = \text{Total Assets} - \text{Total Liabilities}
  • Based on historical cost accounting, meaning it often understates the value of appreciated assets (like real estate) and ignores internally developed intangibles
  • Useful as a floor or sanity check, particularly for asset-heavy industries like banking or manufacturing

Replacement Value

  • Cost to recreate the business's assets at current prices—answers the question "what would it cost to build this from scratch today?"
  • Relevant for insurance coverage and for assessing whether acquiring a company is cheaper than building a competitor organically
  • Ignores intangible assets and going concern value, making it a poor standalone measure for most operating businesses

Compare: Book Value vs. Replacement Value—book value uses historical costs from accounting records, while replacement value uses current costs to acquire equivalent assets. A company with old equipment might show low book value but high replacement value if prices have risen, or vice versa if technology has improved.


Distress and Transaction-Specific Standards

These value types apply to specific circumstances—urgent sales, corporate restructuring, or comprehensive acquisition analysis.

Liquidation Value

  • Proceeds from selling assets quickly, typically under time pressure or unfavorable conditions
  • Usually the lowest value standard because forced sales attract bargain hunters and eliminate competitive bidding
  • Two variants exist: orderly liquidation (reasonable time to sell) versus forced liquidation (immediate sale required)

Enterprise Value

  • Total firm value across the capital structure—calculated as EV=Market Cap+DebtCash\text{EV} = \text{Market Cap} + \text{Debt} - \text{Cash}
  • The acquisition price a buyer would pay to own the entire business, including assuming its debt obligations
  • Enables apples-to-apples comparison between companies with different leverage levels, making it essential for M&A analysis and valuation multiples like EV/EBITDA\text{EV/EBITDA}

Compare: Liquidation Value vs. Going Concern Value—these represent opposite ends of the spectrum. Liquidation value assumes the business stops operating and assets are sold piecemeal; going concern value assumes it continues operating indefinitely. The difference between them represents the value of the business as an organized, functioning entity. If an FRQ asks about bankruptcy analysis, you'll need both.


Quick Reference Table

ConceptBest Examples
Legal/Tax StandardFair Market Value
Current Trading PriceMarket Value
Buyer-Specific WorthInvestment Value, Synergistic Value
Fundamental AnalysisIntrinsic Value
Operating Business AssumptionGoing Concern Value
Balance Sheet BasedBook Value
Asset ReplacementReplacement Value
Distress ScenariosLiquidation Value
M&A and Total Firm ValueEnterprise Value

Self-Check Questions

  1. A private company is being valued for estate tax purposes after the owner's death. Which value standard does the IRS require, and what key assumptions define it?

  2. Compare and contrast book value and intrinsic value—why might these differ dramatically for a technology company with few physical assets?

  3. An acquiring company offers a 30% premium over the target's market value. Which value concept explains why a strategic buyer would pay more than the current stock price?

  4. A company is filing for Chapter 7 bankruptcy. Which two value types would be most relevant for the bankruptcy court, and how would you expect them to compare?

  5. If an investor calculates that a stock's intrinsic value is $50\$50 but it trades at $65\$65, what conclusion would a value investor reach—and which value standard are they comparing against market value?