Glossary

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Premise of Value

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In the context of business valuations, the premise of value refers to the set of assumptions or conditions under which the valuation is conducted. It represents the hypothetical circumstances that establish the foundation for assessing the worth of a business. The premise of value helps determine whether the valuation is based on the assumption that the business will continue to operate as a going concern or if it will be sold in a liquidation scenario.The two primary premises of value are known as Going Concern and Liquidation. The Going Concern premise assumes that the business will continue to operate indefinitely. In a going concern scenario, it is presumed that the business will maintain its normal operations, generate future income, and remain a viable entity. The going concern premise is commonly applied when valuing healthy and operational businesses that are expected to continue their existence in the foreseeable future. The liquidation premise assumes that the business will be terminated, and its assets will be sold off, either individually or as a whole. This scenario is considered when a business is facing financial distress, insolvency, or a decision to cease its operations. The liquidation premise reflects the value of the business’s assets under the assumption that they are sold in a piecemeal fashion, often resulting in a lower valuation compared to the going concern premise. The choice of premise of value depends on the circumstances surrounding the business, the purpose of the valuation, and the specific needs of the valuation stakeholders. Different situations may call for different premises of value, and understanding the underlying assumptions is crucial for arriving at a meaningful and contextually relevant business valuation.

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