Corporate Restructuring, Valuation and Insolvency · Overview of Business Valuation

Concept and Meaning of Business Valuation

Updated 11 October 2026 · Fact-checked

Business valuation is the process of estimating the worth of a business, or an interest in it, on a stated date, for a stated purpose and on a stated basis. Value is an estimate. Price is what is actually paid. Cost is what was spent. To answer any question, name the purpose, the standard of value and the method.

Understand Concept and Meaning of Business Valuation

Start with a simple idea. A business is a bundle of assets, cash flows and risks. Valuation puts one number, or a range, on that bundle. The number is an opinion supported by method and evidence. It is not a fact like a bank balance.

Value, price and cost are three different things. Cost is the amount spent to buy or build something. It is historical. Price is the amount actually agreed and paid in a deal. Value is the worth to a person or to the market, estimated using a method. A buyer may pay a price above or below value. That happens because of bargaining power, urgency, synergies and information.

Value is never absolute. It depends on who is asking, why, and on what date. A business is worth different amounts to a seller, to a strategic buyer, to a lender and to a tax authority. So every valuation must state the purpose, the valuation date and the standard (basis) of value.

The common standards of value are these.

Fair value: the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants on the measurement date. This is the Ind AS 113 meaning. In a wider sense it means a price that is fair to the parties.
Intrinsic value: the value an informed analyst arrives at from the fundamentals of the business, such as expected cash flows, growth and risk. It does not depend on current market quotes.
Market value: the estimated amount at which an asset would exchange between a willing buyer and a willing seller, each acting knowledgeably and without compulsion. For a listed share, it is often the traded price.

Other bases you may meet are liquidation value (what the assets fetch in a forced or orderly sale if the business stops) and going concern value (worth of the business as a continuing operation). Going concern value is usually higher than liquidation value for a healthy business. Choose the basis first. The method follows from it.

Key rules to remember

Value vs price vs cost: Cost = amount spent (past); Price = amount paid in a deal (actual); Value = estimated worth (opinion); Use this to answer any 'distinguish' question. Value can differ from both price and cost.
Going concern premium: Going concern value − Liquidation value = value of the business continuing; Indicative idea only. It shows why the premise of value changes the number.
Value of a business (enterprise basis): Equity value = Enterprise value − Net debt; Net debt = borrowings − cash and cash equivalents. Use when moving between enterprise and equity value.
Four things every valuation must state: Purpose + Valuation date + Standard of value + Premise of value; Missing any one makes the number meaningless.

How to solve Concept and Meaning of Business Valuation questions

Use this method for any written question on the meaning, concept or types of value.

1Define business valuation in one sentence: estimating worth on a date, for a purpose, on a stated basis.
2State that value is an estimate and depends on purpose, date and perspective.
3If asked to distinguish, draw out cost, price and value separately with a short meaning and one reason they differ.
4Name the standard of value asked (fair, intrinsic, market, liquidation, going concern) and define it in your own words.
5Add a short practical example with rupee figures to show the difference.
6Link the standard of value to its use, such as a merger swap ratio, a lender's assessment or a financial reporting need.
7Close with a one-line conclusion: choose the basis by purpose, then choose the method.

Quickest way: Purpose-Date-Basis shortcut

When to use it: Use when you have little time or the question is a short definition or difference.

Write the definition line first.
Write three bullets: cost is past spending, price is the deal amount, value is the estimated worth.
Write one line each for fair, intrinsic and market value.
Add a one-line rupee example.
End by stating that purpose decides the basis.

Common mistakes in Concept and Meaning of Business Valuation

Treating value, price and cost as the same thing
In daily speech the words are used loosely.
Fix: Define each separately. Cost is historical, price is actual, value is estimated.
Saying there is one true value of a business
Students expect valuation to behave like accounting.
Fix: Say value depends on purpose, date, perspective and assumptions. A range is acceptable.
Using fair value and market value as exact synonyms
Both are often close for listed shares.
Fix: Give each its own definition. Fair value is an exit price between market participants; market value is between a willing buyer and seller. Note they may coincide but need not.
Assuming intrinsic value is the current share price
Confusion between analysis and quotation.
Fix: Intrinsic value comes from fundamentals. Market price may be above or below it.
Forgetting the valuation date and purpose in the answer
Students jump straight to the definitions.
Fix: Open with purpose and date. Examiners look for them in case-based answers.

Worked examples

Example 1

Distinguish between value, price and cost with an example. A promoter built a plant for ₹8,00,000 in 2019. Today a valuer estimates its worth at ₹12,00,000. A buyer under time pressure agrees to pay ₹10,50,000.

Show the solution

Cost is the historical spending: ₹8,00,000.
Value is the estimated worth on the valuation date: ₹12,00,000.
Price is the amount actually agreed in the deal: ₹10,50,000.
Price is below value by ₹12,00,000 − ₹10,50,000 = ₹1,50,000. The reason is the buyer's bargaining power and the seller's urgency.
Value is above cost by ₹12,00,000 − ₹8,00,000 = ₹4,00,000. The reason is growth in earning capacity and market conditions.

Answer: Cost ₹8,00,000 is past spending, value ₹12,00,000 is the estimated worth, and price ₹10,50,000 is the amount paid. All three differ, and value is the only one that is an estimate.

Example 2

Explain fair value, intrinsic value and market value of the shares of a company. Why might they differ for Asha Textiles Ltd, a listed company, whose shares trade at ₹90 while an analyst's cash flow work gives ₹110?

Show the solution

Define market value: the price at which the share would exchange between a willing buyer and willing seller without compulsion. Here the traded price is ₹90.
Define intrinsic value: worth based on fundamentals such as expected cash flows, growth and risk. Here the analyst's figure is ₹110.
Define fair value: the price in an orderly transaction between market participants on the measurement date. For a liquid listed share, it is usually the quoted price, so about ₹90.
Compare: intrinsic exceeds market by ₹110 − ₹90 = ₹20.
Give reasons: market sentiment, limited information, liquidity, or the analyst's optimistic assumptions.

Answer: Market value is ₹90 and intrinsic value is ₹110, a gap of ₹20. Fair value for a liquid listed share is generally the quoted price. The gap arises from sentiment, information and differing assumptions. The basis chosen should follow the purpose of the valuation.

Exam tips

Open every answer with a definition that includes purpose, date and basis of value.
For 'distinguish' questions, use short bullet points for each term and add one rupee example.
Write each type of value as its own line so the examiner can tick it.
In case-based questions, name the purpose first, then pick the basis of value, then conclude.
Do not quote a single value as the truth. Use words like estimate and range.

Practice questions from Overview of Business Valuation

Concept and Meaning of Business Valuation in other exams

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

Concept and Meaning of Business Valuation: frequently asked questions

What is business valuation in simple words?

It is the process of estimating how much a business is worth on a given date for a given purpose. The answer depends on the method and assumptions used. It is an informed opinion, not a fixed fact.

What is the difference between value and price?

Value is an estimate of worth made using a method. Price is the amount actually paid in a transaction. Price can be above or below value because of bargaining, urgency and expected synergies.

Is fair value the same as market value?

Not always. They often give similar numbers for liquid listed shares. But the definitions differ: fair value is an exit price between market participants on the measurement date, while market value is the price between a willing buyer and seller.

What is intrinsic value?

It is the worth of a business found by analysing its fundamentals, mainly future cash flows, growth and risk. It does not rely on the current market quote. Market price may sit above or below it.