A Difficult Concept to Pin Down
Many concepts defy scholars’ ability in pin pointing exactly what they are really made of and business value is one of them. For this reason, experts conjure up lots of ‘mini’ valuation concepts to help them in their attempts to crystallize and re-define a concept that refuses to be defined properly. The constraining factor is that it covers such a wide spectrum of the economy no one definition is possible. Other concepts like ‘value network’ or ‘value chain’ pop up to simplify defining it but these are too involved and we will let the experts mull over them.
A More Simplistic Approach
A simpler way of getting a better understanding and grasp of what business value is all about is to delve into the 3 basic ‘mini concepts’ of fair market value, investment value and intrinsic value. Before jumping in and grappling with these ‘mini’ valuation concepts, it needs to be clear at the outset that each one of these concepts follow different paths in so far as what their meanings connote. For example, an investor may have a completely different notion of what business value is than an entrepreneur. The investor focuses on returns whereas the entrepreneur will be more interested in attaining personal wants and needs. Let’s have a look at our ‘mini’ business value concepts.
The Fair Market Value
This measure of business worth focuses mainly on the assets that exist within a business at the time of valuation. The fair market value of the business would be what the monetary amount a potential buyer of the company would be willing to part with to acquire it, and what the vendor is willing to accept as a fair price for the asset. At least this concept clearly establishes that once the buyer and seller agree on a particular price, the deal is sealed and that fair market price.
The Investment Value
This is purely a measure of what a business is worth to an investor and business owner after paying due attention to the goals of the particular business and the risks that the particular business faces. An investor will need to weigh up what his/her goals are along with the risks that impact the business and ascertain whether or not both can achieve his/her objectives. If they measure up and the business owner also agrees with the investor’s assessment, the investment value is set.
The Intrinsic value
This valuation is synonymous to the true inherent economic potential of a company and is based on an investor’s detailed understanding of a company’s weaknesses and strengths. The valuation is particularly enticing to investors who have a very detailed and in-depth understanding of the fundamental metrics of a company. These metrics all combine to allow the investor to make an informed decision on whether or not to invest in the company and if so, by how much for a call or a put.