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Corporate Restructuring, Valuation and Insolvency · Overview of Business Valuation

Principles and Premises of Value in Business Valuation

Updated 11 October 2026 · Fact-checked

A premise of value is the assumption about how an asset or business will be used or sold when it is valued. The main premises are going concern, orderly liquidation and forced liquidation. You pick the premise that fits the facts, state it, and value on that basis. The same business gives different values under each premise.

Understand Principles and Premises of Value

Valuation is not finding one true number. It is an opinion of value for a stated purpose, on a stated date, on stated assumptions. Two ideas make those assumptions clear: the standard of value and the premise of value.

The standard of value says what kind of value you are measuring. Examples are fair value, fair market value and investment value. It defines who the notional buyer and seller are. The premise of value says under what circumstances the business is assumed to be used or sold. Do not mix the two up. Standard answers 'what value?'. Premise answers 'on what assumption about the business?'.

The going concern premise assumes the business will continue to operate for the foreseeable future. Its value comes from earning power: cash flows, brand, workforce, customer base and goodwill. Value is usually higher because the assets work together. You normally use income or market approaches here.

The liquidation premise assumes the business stops and its assets are sold piece by piece. Value is what the assets fetch, less the costs of sale and liabilities to be paid. There are two variants. In orderly liquidation, there is a reasonable time to find the best buyers, so prices are close to market. In forced liquidation, assets must be sold quickly, often at auction or under pressure, so prices are lower.

Core principles follow from this. Value depends on purpose and date. It looks to the future benefits the owner can expect. It is a function of risk and return. It rests on the highest and best use of the asset. The valuer must use reliable information, apply judgment, and disclose assumptions. A premise must be supported by facts: a profitable business with no distress signs supports going concern; losses, a closure decision or insolvency may support liquidation.

Key rules to remember

Going concern value (income view)
Value = Present value of expected future cash flows, discounted at a rate reflecting risk
Used when the business is expected to continue. Higher risk means a higher discount rate and a lower value.
Liquidation value (net)
Liquidation value = Net realisable value of assets − Cost of disposal − Liabilities settled
Under forced sale, realisable values are lower than under orderly sale. Liabilities are paid in their legal order of priority.
Ordering of premises
Going concern value ≥ Orderly liquidation value ≥ Forced liquidation value (usual case)
This is a general tendency, not a rule. A loss-making business can be worth more in liquidation than as a going concern.
Standard vs premise
Standard of value = what value is measured; Premise of value = assumed use or sale circumstances
Always state both in a valuation answer.

How to solve Principles and Premises of Value questions

Use this method for any question asking you to explain, distinguish or apply premises of value.

  1. 1Identify the purpose and date of valuation from the facts, such as merger, sale, lending or winding up.
  2. 2State the standard of value that suits the purpose, in one line.
  3. 3Check the facts for the business's health: profits, cash flow, closure decision, insolvency, time pressure to sell.
  4. 4Choose the premise: going concern if operations continue; orderly liquidation if closing with adequate time; forced liquidation if urgent sale.
  5. 5Link the premise to the method: income or market approach for going concern; asset-based net realisable values for liquidation.
  6. 6Compute or explain the value, deducting costs of sale and liabilities where liquidation applies.
  7. 7Conclude with the chosen premise, the reason, and a note that a different premise would give a different value.

Quickest way: Three-question premise test

When to use it: For short-answer or case questions where time is tight and you need the right premise quickly.

  1. Ask: will the business keep operating? If yes, going concern.
  2. If no, ask: is there enough time to market the assets? If yes, orderly liquidation; if no, forced.
  3. Write the premise, one reason from the facts, and the matching approach. Add the costs and liabilities deduction for liquidation.

Common mistakes in Principles and Premises of Value

  • Treating standard of value and premise of value as the same thing.

    Both sound like 'basis of value' and are taught together.

    Fix: Write one line for each: the standard says what value is measured, the premise says the assumed circumstances of use or sale.

  • Assuming going concern value is always higher than liquidation value.

    Students memorise the usual ordering as a rule.

    Fix: Say 'usually'. A business with losses and valuable land may be worth more if broken up.

  • Using going concern for a company already in liquidation or insolvency.

    Students default to the income approach.

    Fix: Read the facts for distress, closure or a liquidation order. Then use the liquidation premise.

  • Confusing orderly and forced sale.

    Both involve selling assets piece by piece.

    Fix: Remember the test is time. Orderly has reasonable time to find buyers; forced is a hurried sale at a discount.

  • Forgetting to deduct liquidation costs and liabilities.

    Students stop at the sale price of assets.

    Fix: Always show net proceeds: sale value less selling costs less liabilities, to reach what is left for owners.

  • Not stating the premise in the answer.

    Students jump straight to the number.

    Fix: Open the conclusion with the premise and the reason. Examiners award marks for the assumption.

Worked examples

Example 1

Sunrise Textiles Ltd has stopped production and the board has decided to close down. Its assets have a book value of ₹10,00,000. In an orderly sale over six months they are expected to fetch 70% of book value. Selling costs are ₹50,000 and liabilities are ₹4,00,000. Which premise applies and what is the value left for shareholders?

Show the solution
  1. The board has decided to close, so going concern does not apply. There is time (six months), so the premise is orderly liquidation.
  2. Expected sale proceeds = 70% × ₹10,00,000 = ₹7,00,000.
  3. Less selling costs ₹50,000 gives ₹6,50,000.
  4. Less liabilities ₹4,00,000 gives ₹2,50,000.
  5. This is the net amount for shareholders.

Answer: Orderly liquidation premise applies. Net value for shareholders is ₹2,50,000.

Example 2

For the same company, a lender wants the assets sold within two weeks, and they will fetch only 50% of book value. Selling costs are ₹50,000 and liabilities are ₹4,00,000. Find the value under this premise and compare it with the orderly case.

Show the solution
  1. A two-week deadline means little time to find buyers, so the premise is forced liquidation.
  2. Sale proceeds = 50% × ₹10,00,000 = ₹5,00,000.
  3. Less selling costs ₹50,000 gives ₹4,50,000.
  4. Less liabilities ₹4,00,000 gives ₹50,000.
  5. Orderly value was ₹2,50,000, so forced sale gives ₹2,00,000 less.
  6. The gap arises only from the lack of time, as the assets are the same.

Answer: Forced liquidation value is ₹50,000, which is ₹2,00,000 lower than the orderly liquidation value of ₹2,50,000.

Exam tips

  • For 'distinguish' questions, use a two-column comparison in points: basis, assumption, approach, typical value, example.
  • Always mention that the premise must fit the facts and must be disclosed in the valuation report.
  • In case questions, quote the fact that decides the premise, such as closure decision or urgent sale.
  • In liquidation answers, show the deduction of sale costs and liabilities line by line.
  • Define standard of value in one line even if the question only asks for premise.

Practice questions from Overview of Business Valuation

Principles 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.

Principles and Premises of Value: frequently asked questions

What is the difference between going concern value and liquidation value?

Going concern value assumes the business keeps operating and is based on its future earnings. Liquidation value assumes operations stop and assets are sold separately, net of costs and liabilities. Going concern value is usually higher, but not always.

What is the difference between standard of value and premise of value?

The standard of value defines the kind of value being measured, such as fair value or fair market value. The premise of value is the assumption about how the business is used or sold, such as going concern or liquidation.

What is the difference between orderly and forced liquidation?

In orderly liquidation, the seller has reasonable time to find the best buyers, so prices are closer to market. In forced liquidation, assets are sold in a hurry, so prices are lower.

Can a business have more than one value?

Yes. The same business can have different values under different premises, standards, purposes and dates. This is why a valuer must state the premise and assumptions clearly.