Saturday Brain Storming Thought (145) 25/12/2021
COMPILED BY ER. AVINASH KULKARNI
PREMISE OF VALUE
The premise of value is related to the standard of value and is the assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation
For example, the company will be a going concern (to be valued as if the company will continue to be operated in the same fashion it is)
Elements of Value
1) Standard of Value
Typically, Fair Market Value
2) Level of Value
Generally, Control Valve
3) Premise of Value
How much cash/capital and when?
Control Value
The value of the control is a quantitative measure of the value of controlling the outcome of an uncertain variable
Premise of Value
The premise of value identifies how a business is being sold, either as one functioning business or sold off in pieces
Going concern value or liquidation value
For valuation of controlling interests, the premise of the value selected based on the highest and best use of the valuation subject
The fact and circumstances of the business may also warrant a specific premise of value
If management states that they plan to continue operating business as a going concern, then a liquidation premise of value may be inappropriate
Considerations of Premises of Valuation
1) Time period of the sale (no time pressure to sell your business)
2) Market conditions prevailing around your business
3) Prudence of the buyer to buy
4) Prudence of yourself to sell
5) Knowledge of the buyer about our business
6) Knowledge about the buyers creditworthiness
7) Freedom for you to sell (no compulsion to sell your business)
8) Buyers motivation to buy
9) Quantum of your marketing efforts (normal marketing or no marketing)
10) Percentage of cash settlement
The premise of Value as per IVS-101
It defines the premise of value to be the conditions and circumstances how an asset is deployed
It’s a kind of assumption or a statement regarding the most likely set of transactional circumstances that may be applicable to the subject valuation
Importance of Premise of Value
The premise of value is a critical step for selecting the right approach to compute tge fair value of any asset/liability
It’s the premise of value that helps the valuer to determine what approach he should use to compute the value of asset/liability
The premise of Value as per IVS-102
Identifies some of the following common premises of value
1) Highest and Best Use (HABU)
HABU is generally used for a non-financial asset
HABU should be physically possible, legally permissible, and financially feasible
2) Going Concern Value
Going concern value is the value of an enterprise that is expected to continue its operations and not liquidate in the near future
The value apart from the tangible assets also includes intangible assets such as Goodwill due to trained workforce, the presence of operational plant, necessary licenses, marketing systems, procedures in place etc
3) As-is-where-is Value
As-is-where-is value represents the existing use
This may not be a HABU of the asset
This may be used in a valuation for the purposes of Financial Reporting
4) Orderly Liquidation
An orderly liquidation refers to the realizable value of an asset in the event of liquidation after allowing appropriate marketing efforts and a reasonable period of time to market the asset on an as-is, where-is basis
What is a reasonable period of time may vary depending on the asset type, market conditions etc
5) Forced Transaction
Sometimes, an owner of the asset may be under a compulsion to sell the asset within a limited period of time, as a result of which, the owner may not fetch its true value
A typical example of a forced transaction would be an Auction
Key points of Premise of Value
1) the premise of value shall reflect the facts and circumstances underlying the asset to be valued and the purpose of the valuation
2) the premises will have an impact on the other factors of valuation such as valuation bases, approaches, methodology, etc
3) the premise of value shall be mutually agreed upon by the valuer and the client and shall also be documented as part of the engagement letter
Clinical skills required for premise of value
1) Awareness
Awareness of values and of differences of values
2) Knowledge
Knowledge retrieval and it’s limitations
3) Reasoning
Used to explore the values in play rather than to solve dilemmas
4) Communication
Especially for eliciting values and for conflict resolution
Steps in Premise of value process
1) engage the service of a business valuation professional
2) understand the purpose of a valuation
3) determine the basis of value
4) determine the premise of value
5) gather relevant data
6) review the historic performance of the business
7) determine the future outlook for the business
8) determine the valuation approach to use
9) apply discounts
10) arrive at a determination of value
