You hire an appraiser or an appraisal firm because you need to determine the value of an asset.  However, without identification of the proper Standard of Value, the appraisal report may be useless for the purpose of the assignment.

The standard of value is the most critical criteria for an appraiser to determine the value of an asset. Along with the date of valuation, the standard of value sets the critical parameters in determining the value obtained in an appraisal assignment and fixes the use of that appraisal report.

The following seven (7) standards of value are the ones most frequently requested by business owners, corporate managers, lending institution, and professional advisors:

Fair Market Value (FMV)

The Internal Revenue Service (IRS) defines fair market value as "the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, nor both having reasonable knowledge of the relevant facts..." (IRS Publication 561).

This means that FMV is the amount for which property would sell on the open market if put up for sale in the ordinary course of business. Fair market value is the actual or cash value of property and is usually determined by the purchase price of similar goods or property in the same locality. Fair market value is a price determined with the assumption that both buyer and seller are in possession of all pertinent facts, and free from market restraints or pressures.

This standard must be utilized in any valuation for gift, estate, or inheritance tax purposes.

Going Concern Value - Premise of Value

The Going Concern Value is the value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place.

Going Concern Value is most similar to the Market Value of the business operation which includes the assets of the business. Within real estate appraisal, there are some property types and situations where separating the real estate value from the business value can be very difficult and/or impractical. For instance, with fuel stations, car washes, or convenience stores, the real estate and business are very closely tied. Typically, when making a loan for this type of property, a lender will request the total value of the going concern which is to include the combination of both the real estate and business values.

Liquidation Value - Premise of Value

The net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either "orderly" or "forced."

Orderly Liquidation Value
Orderly Liquidation Value is typically required by lending institutions for machinery and equipment. It is the same as Fair Market Value except now there is a compulsion to sell the asset. While subjective, the asset should be sold in 12 months or less and is calculated net of removal costs, if applicable. The value may also be computed as "severed," or removed from the production area.

Forced Liquidation Value
Forced Liquidation value adds a more severe time compulsion, including immediate auction, which can significantly decrease the value of the asset(s).

Fair Value - Statutory
The predominant standard of value employed by state courts to determine the value of minority shares in appraisal cases is fair value, which is determined by state law. In most states, fair value is the shareholder's pro rata portion of the value of a company's equity. This measure of value differs from fair market value, third-party sale value, and fair value for GAAP purposes.

Statutory "fair value" is the standard of value for valuation in the dissenters' rights and shareholder oppression statutes of the majority of states. Disagreements over the applicability (or not) of certain valuation premiums or discounts provide the source of significant differences of opinion between counsel for dissenting shareholders and, unfortunately, between business appraisers.

Market Value (FIRREA)

The Financial Institutions Reform, Recovery And Enforcement Act (FIRREA) was enacted in 1989 in part to ensure that real estate appraisals are performed up to standard. This includes regulation on the competency of the appraisers, supervisory standards and accurate and full documentation. When preparing an appraisal for a lending institution or the IRS, the following definition of market value must be applied: 

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.  Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

    • buyer and seller are typically motivated;
    • both parties are well informed or well advised, and acting in what they consider their best interests;
    • a reasonable time is allowed for exposure in the open market;
    • payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and
    • the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Fair Value (FV) - ASC820

Fair Value is defined as "[t]he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." This standard must be used for purchase price allocation valuations and financial reporting for publicly traded companies in the United States or privately-held companies reporting under US GAAP.

Investment Value

The International Glossary of Business Valuation Terms defines Investment Value as "[t]he value to a particular investor based on individual investment requirements or expectations." The Guide to Business Valuation Glossary adds the phrase " distinguished from the concept of market value, which is impersonal and detached."

The idea of investment value is that it is not based on a hypothetical purchaser who represents a composite of all purchasers for value, but instead on the value to a specified individual with a specified set of investment criteria and especially those with the potential for synergistic value. It arises mostly where the appraiser is asked to estimate the value of a business entity to a potential purchaser who is known and identified at the outset. This might be the value, perhaps, of shares in a target company to its acquirer, where the merger of the acquirer and the target together will result in a combined value greater than the sum of the individual values.

Intrinsic Value

Intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value which includes all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.

Insurable Replacement Cost New (IRCN)

IRCN is the cost of replacing an existing asset - without regard to economic obsolescence or depreciation - with one of equal utility, although the same materials or the same design may not be used, reflecting changes in technology, design, techniques, and costs. This standard of value is used when determining the amount of insurance coverage to place on an asset. The IRCN may also include additional utility due to legal or mandated improvements, for example safety or environmental performance.

While the standard of value concepts can seem confusing, if you discuss the intended use of your valuation with your appraiser, he or she will guide you as to which is the best standard of value to meet your needs.

Please contact Frank Merenda at for further information.