Strategic Performance Management and Business Valuation · Fundamentals of Business Valuation

Standards and Premises of Value in Business Valuation

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

Fair market value is the price between a hypothetical willing buyer and seller, both informed and under no compulsion. Fair value under Ind AS 113 is the exit price in an orderly transaction between market participants at the measurement date. The two often give similar results but come from different frameworks.

Q: What is the difference between intrinsic value and market value?

Market value is the price at which the asset trades or could trade in the market. Intrinsic value is an estimate of worth based on fundamentals such as cash flows, growth and risk. If intrinsic value is above market price, the asset may be undervalued.

Q: When should I use the liquidation premise instead of going concern?

Use liquidation when the business is not expected to continue, for example closure, winding up or insolvency where the business has no viable future. It can also act as a floor check when a going concern value looks lower than asset realisation value.

Q: Can the same company have different values at the same time?

Yes. Value depends on the standard and premise chosen and on the purpose of the valuation. A company can have a different fair market value, investment value and liquidation value on the same date, and each can be correct for its own purpose.

Updated 11 October 2026 · Fact-checked

A standard of value defines what kind of value you are measuring and for whom, such as fair market value, fair value, investment value or intrinsic value. A premise of value states the assumed condition of the business, such as going concern or liquidation. To solve a question, fix the purpose, choose the standard, then choose the premise.

Understand Standards and Premises of Value

A business does not have one single value. The number you get depends on two choices made before any calculation: the standard of value and the premise of value. Examiners test whether you can make these choices from the facts given.

Standard of value answers the question: value in whose eyes, and under what assumptions? The common standards are:

Fair market value (FMV): the price at which a property would change hands between a hypothetical willing buyer and a willing seller. Both act with reasonable knowledge of the facts and neither is under compulsion. It is not tied to one particular buyer.
Fair value: depends on the context. In financial reporting under Ind AS 113, it is an exit price: the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In some legal contexts, such as shareholder disputes, it can mean a share of the enterprise value without discounts for minority or lack of marketability. Always say which meaning you use.
Investment value: the value to a specific investor, based on that investor's own requirements, expected synergies and risk appetite. It can be higher or lower than FMV.
Intrinsic value: the value an analyst believes the business has, based on its fundamentals such as expected cash flows, growth and risk. It is a view, and it may differ from the market price. If market price is below intrinsic value, the share looks undervalued.

Premise of value describes the assumed state of the business. Under going concern, the business continues to operate, so value comes from future earnings and cash flows. Under liquidation, the business stops and its assets are sold. Liquidation can be orderly (reasonable time to find buyers, so higher proceeds) or forced (quick sale, so lower proceeds). Liquidation value is usually net of selling costs and liabilities to be settled.

The two choices work together. For example, a profitable company being bought by a strategic buyer may be valued at investment value on a going concern premise. A company under insolvency proceedings may be valued at a liquidation premise. The same business can legitimately have different values under different standards, so state your assumptions clearly.

Key rules to remember

Fair market value test: FMV = price between a hypothetical willing buyer and willing seller, both informed, neither under compulsion; Not buyer-specific. Synergies special to one buyer are generally excluded.
Fair value (Ind AS 113): Fair value = exit price in an orderly transaction between market participants at the measurement date; Market-based, not entity-specific. Mention the measurement date.
Investment value: Investment value = value to a particular investor using that investor's own cash flows, synergies and required return; Entity or investor specific, so it can differ from FMV.
Intrinsic value comparison: If intrinsic value > market price: undervalued. If intrinsic value < market price: overvalued; Intrinsic value is an estimate, so the conclusion depends on the assumptions.
Liquidation value: Net liquidation value = Realisable value of assets − Costs of disposal − Liabilities settled; Use lower values for forced sale and higher values for orderly sale.
Going concern premise: Going concern value = present value of expected future cash flows of continuing operations; Typically higher than liquidation value for a profitable business.

How to solve Standards and Premises of Value questions

Use this sequence for any question on standards and premises of value, whether it is an MCQ, a theory note or a case.

1Read the purpose of the valuation: sale, financial reporting, tax, dispute, insolvency, investment decision or internal planning.
2Identify who the value is for. A hypothetical market participant points to FMV or fair value. A named buyer with synergies points to investment value.
3Pick the standard. Reporting under Ind AS means fair value as an exit price. A neutral price between informed parties means FMV. A personal view of worth from fundamentals means intrinsic value.
4Check the condition of the business. Operating and viable means going concern. Closure, insolvency or loss-making with no future means liquidation. Decide whether it is orderly or forced.
5Match the method to the premise: income or market approach for going concern, asset realisation for liquidation.
6Do any calculation and deduct selling costs and liabilities where the premise is liquidation.
7State the conclusion and the assumptions in one or two lines, and note how a different standard or premise would change the value.

Quickest way: Purpose, Party, Premise in 30 seconds

When to use it: Use for MCQs and short case scenarios where you must name the correct standard or premise quickly.

Underline the purpose word in the question (reporting, sale, dispute, closure).
Ask: is the buyer hypothetical or a named one? Hypothetical gives FMV or fair value. Named gives investment value.
Ask: is the business going to keep running? If yes, going concern. If no, liquidation.
Look for time pressure words such as urgent or forced to pick forced liquidation over orderly.
Eliminate options that mix up entity-specific and market-based ideas.

Common mistakes in Standards and Premises of Value

Treating fair market value and fair value as identical in every context.
Both sound like a market price and many books use them loosely.
Fix: Say that fair value under Ind AS 113 is an exit price at the measurement date, while FMV is the price between a hypothetical willing buyer and seller. Note that they often give similar numbers but differ in definition and context.
Confusing intrinsic value with market value.
Students assume the quoted price is the true worth.
Fix: Market value is the price observed in trading. Intrinsic value is an analyst's estimate from fundamentals. Their gap signals under or overvaluation.
Including buyer-specific synergies in FMV.
Students add all benefits mentioned in the case.
Fix: Include synergies only when the standard is investment value. Exclude them from FMV unless a typical buyer could also realise them.
Using going concern value for a business that is closing.
Students default to the DCF method for every case.
Fix: Read the facts. If closure or insolvency is stated, use the liquidation premise and value assets at realisable amounts.
Forgetting to deduct disposal costs and liabilities in liquidation value.
Students stop after listing asset sale proceeds.
Fix: Subtract costs of sale and settle liabilities in order of priority. Only the balance is available to equity holders.
Treating all liquidation as a forced sale.
The word liquidation suggests distress.
Fix: Distinguish orderly liquidation, with adequate time and higher proceeds, from forced liquidation, with a quick sale and lower proceeds.

Worked examples

Example 1

Arya Textiles Ltd is profitable and expects to continue operating. Its net assets at realisable values in a quick sale would be ₹6,00,000 after costs. In an orderly sale over six months they would be ₹8,50,000 after costs. A DCF of its expected cash flows gives ₹14,00,000. Which premise and value should be reported for a sale of the company to an unrelated buyer, and what are the values under each premise?

Show the solution

Purpose is a sale to an unrelated buyer, so the buyer is a hypothetical market participant. The standard is fair market value.
The company is profitable and expects to continue, so the premise is going concern.
Going concern value from the DCF is ₹14,00,000.
Forced liquidation value is ₹6,00,000 and orderly liquidation value is ₹8,50,000.
The going concern value exceeds both liquidation values, so the business is worth more as a continuing operation. Liquidation is not the appropriate premise.

Answer: Report fair market value on a going concern premise: ₹14,00,000. For comparison, orderly liquidation value is ₹8,50,000 and forced liquidation value is ₹6,00,000.

Example 2

Meridian Pharma's shares trade at ₹420. An analyst estimates intrinsic value at ₹480 per share from projected cash flows. A strategic buyer, Kaveri Labs, expects synergies that raise its own valuation to ₹540 per share. (a) Identify each value by standard. (b) State whether the share looks undervalued and what a rational bid range would be for Kaveri Labs.

Show the solution

The ₹420 trading price is market value, an observed price.
The ₹480 estimate from fundamentals is intrinsic value.
The ₹540 value reflects Kaveri Labs' own synergies, so it is investment value.
Intrinsic value ₹480 is greater than market price ₹420, so the share looks undervalued by ₹60 per share on the analyst's assumptions.
Kaveri Labs should not pay more than its investment value of ₹540, or it would give away all its synergy gains. A bid above ₹420 is needed to attract sellers, and a price near ₹480 would be consistent with fundamentals.
Any price between ₹420 and ₹540 leaves Kaveri Labs some gain, and the lower the price, the larger its share of the synergy.

Answer: ₹420 is market value, ₹480 is intrinsic value, ₹540 is investment value for Kaveri Labs. The share looks undervalued, and Kaveri Labs can rationally bid between ₹420 and ₹540, with ₹540 as the ceiling.

Exam tips

In MCQs, the keywords decide the answer: hypothetical buyer means FMV, specific buyer or synergy means investment value, exit price or Ind AS means fair value.
When asked for differences, use a two-column style in sentences or bullets covering basis, party, synergies and typical use.
In case answers, always state the premise as an assumption and say why the facts support it.
For liquidation values, show the deduction of selling costs and liabilities line by line to earn working marks.
Close an answer with a note on how the value would change under another standard or premise.

Practice questions from Fundamentals of Business Valuation

Standards and Premises 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.

Standards and Premises of Value: frequently asked questions

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

Fair market value is the price between a hypothetical willing buyer and seller, both informed and under no compulsion. Fair value under Ind AS 113 is the exit price in an orderly transaction between market participants at the measurement date. The two often give similar results but come from different frameworks.

What is the difference between intrinsic value and market value?

Market value is the price at which the asset trades or could trade in the market. Intrinsic value is an estimate of worth based on fundamentals such as cash flows, growth and risk. If intrinsic value is above market price, the asset may be undervalued.

When should I use the liquidation premise instead of going concern?

Use liquidation when the business is not expected to continue, for example closure, winding up or insolvency where the business has no viable future. It can also act as a floor check when a going concern value looks lower than asset realisation value.

Can the same company have different values at the same time?

Yes. Value depends on the standard and premise chosen and on the purpose of the valuation. A company can have a different fair market value, investment value and liquidation value on the same date, and each can be correct for its own purpose.