Strategic Performance Management and Business Valuation · Business Valuation Methods and Approaches

Introduction to Business Valuation and Standards of Value

Updated 11 October 2026 · Fact-checked

Business valuation estimates what a business or its shares are worth for a stated purpose. You first fix the purpose, the standard of value (fair market value, fair value or investment value), the premise (going concern or liquidation) and the date. Then you choose an approach, compute, and report.

Understand Introduction to Business Valuation and Standards of Value

A business has no single price. Its worth depends on who is asking and why. A promoter selling a company, a bank taking security, a buyer paying for synergies and a tax officer testing a transfer price can all need different numbers for the same business.

That is why valuation starts with the purpose. Common purposes are mergers and acquisitions, fundraising, sale or purchase of shares, joint ventures, insolvency and liquidation, financial reporting, tax and regulatory compliance, employee stock options and dispute settlement.

The purpose drives two choices. The first is the standard of value, which defines what kind of value you are measuring. The second is the premise of value, which is the assumption about how the business will be used: as a going concern that continues to operate, or under liquidation, either orderly or forced.

The main standards are these. Fair market value is the price at which a property would change hands between a willing buyer and a willing seller, both knowing the relevant facts and neither under compulsion. It is a hypothetical, market-based value. Fair value under financial reporting (Ind AS 113) is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Investment value is the value to one particular investor, based on that investor's own requirements, synergies and expected returns. It can be above or below market value.

Treat the exact legal wording of fair value as depending on the law or standard in use. Company law, tax law and accounting may define it slightly differently. In an exam, state which definition you are applying.

The valuation process is a sequence: define the engagement (purpose, standard, premise, valuation date), collect and analyse information, select the approach (asset, income or market), apply it and arrive at a value, then reconcile results and report with assumptions and limitations.

Key rules to remember

Fair market value (concept): FMV = price between a willing buyer and a willing seller, both informed, neither under compulsion; Hypothetical market-based value. Not tied to any one buyer's synergies.
Fair value (Ind AS 113): Fair value = price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; An exit price from the market participant's view. Not the entity's own intended use.
Investment value (concept): Investment value = value to a specific investor based on that investor's own requirements, synergies and expected returns; Can differ from FMV. The gap often reflects the buyer's synergies.
Premise of value: Going concern value vs liquidation value (orderly or forced); Going concern normally gives a higher value than forced liquidation for a viable business.
Valuation process: Purpose → standard and premise → information → approach → computation → reconciliation → report; Use this order as the skeleton of any descriptive answer.

How to solve Introduction to Business Valuation and Standards of Value questions

For any question on introduction, purposes or standards of value, follow this order so that your answer is structured and scores on application.

1Read the scenario and underline the purpose: sale, merger, insolvency, tax, reporting, ESOP or dispute.
2Name the standard of value that fits the purpose and give its one-line definition.
3State the premise: going concern or liquidation (orderly or forced), and why.
4Mention the valuation date and the information you would need.
5Choose the approach (asset, income or market) and justify it for this business.
6If asked to compare standards, contrast on three points: whose viewpoint, whether synergies are included, and where it is used.
7Close with a clear conclusion in one sentence, naming the standard and premise you recommend.

Quickest way: Purpose-Standard-Premise check

When to use it: For MCQs and short case questions where you must pick the right standard or premise fast.

Ask: who is the value for? A market in general points to fair market value or fair value. One specific buyer points to investment value.
Ask: is it an accounting measurement date exit price? That points to fair value under Ind AS 113.
Ask: is the business viable and continuing? Use going concern. Is it being wound up? Use liquidation.
Ask: is there a forced sale with short time? That is forced liquidation and gives the lowest value.
Eliminate options that mix a buyer's synergies into fair market value.

Common mistakes in Introduction to Business Valuation and Standards of Value

Treating fair market value and investment value as the same.
Both are called a worth of the business, and students ignore whose viewpoint is used.
Fix: Link FMV to a hypothetical informed buyer and seller, and investment value to one named investor with its own synergies.
Saying a business has one true value.
Students expect a single answer as in accounting problems.
Fix: Say that value depends on purpose, standard, premise and date, and state these first.
Using going concern premise for a business that is being wound up.
Students default to income-based methods without reading the scenario.
Fix: Check for words like winding up, insolvency or forced sale and switch to liquidation premise.
Mixing up fair value under Ind AS 113 with fair market value.
The names are similar and are often used loosely.
Fix: Remember fair value is an exit price between market participants at the measurement date. State the source of the definition you use.
Skipping the valuation date and assumptions in the process.
Students jump straight to methods.
Fix: Always list engagement terms first and mention the date, information and limitations in your report.

Worked examples

Example 1

Ashoka Textiles Ltd is being acquired by Bharat Fabrics Ltd. Bharat expects cost savings of ₹4 crore from combining operations. An independent valuer values Ashoka at ₹50 crore as a stand-alone business, on a basis assuming an informed willing buyer and seller. Bharat computes ₹54 crore after including its own savings. Identify the two values and explain the difference.

Show the solution

The independent valuer's ₹50 crore assumes a hypothetical informed willing buyer and seller with no compulsion. This is fair market value.
Bharat's ₹54 crore includes synergies specific to Bharat. This is investment value.
Difference = ₹54 crore − ₹50 crore = ₹4 crore.
This equals the expected cost savings, which are specific to Bharat and so are not part of fair market value.
Bharat should not pay more than ₹54 crore, or it gives away all its synergy. Negotiation will usually settle between the two figures.

Answer: ₹50 crore is fair market value and ₹54 crore is investment value. The ₹4 crore difference is Bharat's buyer-specific synergy.

Example 2

Kaveri Engineering Ltd is financially distressed and a lender has asked for a valuation to decide on recovery. The creditors expect the assets to be sold quickly within weeks. Which premise of value applies, and outline the valuation process you would follow.

Show the solution

The purpose is recovery by the lender under distress, so the business is not expected to continue.
A quick sale within weeks points to forced liquidation premise, which usually gives lower values than orderly liquidation.
Step 1: define the engagement: purpose (recovery), standard (liquidation value), premise (forced liquidation), and valuation date.
Step 2: collect asset registers, creditor lists, title documents and recent market prices for similar assets.
Step 3: select the asset-based approach, since income and market multiples of a going concern do not fit.
Step 4: value each asset at the amount realisable in a quick sale and deduct sale costs and liabilities in order of priority.
Step 5: reconcile with any available market evidence and report the value with assumptions and limitations.

Answer: Forced liquidation premise applies. Use the asset-based approach after defining purpose, standard and date, and report realisable values with assumptions.

Exam tips

Begin every case answer with purpose, standard and premise. Examiners reward this structure.
In MCQs, look for key phrases: willing buyer and seller points to fair market value; specific investor or synergy points to investment value; exit price at measurement date points to fair value.
When comparing standards, use a three-point contrast and keep each point to one line.
State the source of any definition you use, as company law, tax and accounting can differ in wording.
For numerical differences between standards, identify the gap as buyer-specific synergy or similar item and explain it.

Practice questions from Business Valuation Methods and Approaches

Introduction to Business Valuation and Standards of Value in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Introduction to Business Valuation and Standards of Value: frequently asked questions

What is the difference between fair value and fair market value?

Fair market value is a price between an informed willing buyer and seller with no compulsion. Fair value under Ind AS 113 is an exit price in an orderly transaction between market participants at the measurement date. They often give similar numbers but come from different definitions, so name the one you use.

What is investment value?

It is the value of a business to one specific investor, based on that investor's own return needs and synergies. It can be higher or lower than fair market value.

Why does the purpose of valuation matter?

Purpose decides the standard and premise of value, and so the approach and the final figure. The same business can have different values for a sale, a tax filing and a liquidation.

What are the main steps in the valuation process?

Define the engagement, gather and analyse information, select an approach, compute the value, reconcile results and report with assumptions and limitations.