http://valuationacademy.com Types of Value- Fair Market Value, Intrinsic Value, Liquidation Value, Investment Value — Valuation Academy

Types of Value- Fair Market Value, Intrinsic Value, Liquidation Value, Investment Value

To understand and differentiate types of value is important as valuations are needed in many ways for many reasons.

Fair Market Value is the most probable price which a company or an asset would bring in a competitive and open market (in a fair sale). It is an estimate of the market value that an interested, knowledgeable but not desperate buyer is willing to pay an interested, knowledgeable but not desperate seller, assuming the company or asset is exposed on the open market for a reasonable period of time and the sale is paid using cash or cash equivalent. Willing buyers can include strategic buyers (buyers that are in the space already) or financial buyers (private equity). Given all these conditions, fair market value should be an accurate and fair valuation of the worth. Fair Value is a very similar concept to fair market value with minor differences. It is usually used in financial reporting or litigation matters.

Intrinsic value is the actual value of a company or an asset as opposed to its market value. It is also called fundamental value. It includes variables such as brand name, patents, copyrights, business model and personal contacts which are difficult to properly value in the open market. Therefore intrinsic value is a more subjective term than fair market value as different investors use different techniques to calculate intrinsic value.

Liquidation value is the price of a company’s tangible assets if it goes out of business and needs to be liquidated within limited period of time. Liquidation value is typical lower than fair market value as is it allowed insufficient exposure to the investors in the open market . Intangible assets, including the intellectual properties, reputations and goodwill, are not included in liquidation value. If the company were to be sold rather than liquidated, then the price is called going–concern value which includes the liquidation value and the present value of its intangible assets.

Investment value is the value of a company or an asset to a particular investor, using the investor’s specific judgments and assumptions. It can be much higher than the fair market value to an investor who has ability to put the asset to use in its maximum productive way, and it can also be lower than the fair market value to an investor who has limited ability to make the best use of the property. For example: In June of 2012, Starbucks acquired bakery chain Bay Bread (and its La Boulange Brand) for $100MM. The investment value to Starbucks was likely much higher than $100MM because of the significant retail network that Starbucks has from its stores in addition to cost synergies, so Starbucks could have paid much more for this brand. Think of  investment value as an upper limit to how much a company will be willing to pay for an asset.