“PREMISE OF VALUE”-MEANING & DEFINITION: COMPILED BY ER. AVINASH KULKARNI

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

Compiled by:-

Er. Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer

FOR ALL UPDATES IN EMPANELMENTS & OTHER UPDATED

GET ALL RELATED NEWS UPDATES IMMEDIATELY BY JOINING THE SOCIAL MEDIA PLATFORMS OF CEV GROP BY CLICKING THE LINK PROVIDED IN THE NEWS

JOIN SOCIAL MEDIA PLATFORMS OF CEV INDIA FOR ALL UPDATES RELATED TO THE PROFESSION

FACEBOOK PAGE CEV INDIA,                         TELEGRAM GROUP,                                 YOUTUBE CHANNEL

Disclaimer :

We take all possible care for accurate & authentic news/empanelment/tender information, however, Users are requested to refer Original source of the Notice / Tender Document published by the Issuing Agency before taking any call regarding this tender.

Leave a Reply

error: Content is protected !!