"With respect to a business enterprise, Book Value is the difference between total assets (net of accumulated depreciation, depletion,
and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder's Equity). With respect to a
specific asset, Book Value is the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business
Book Value is synonmous with Shareholder's Equity, Net Worth, and Net Book Value. It is essentially the difference between
the total Book Value of a company's Assets and the total Book Value of its Liabilities.
Assets are generally recorded at historical cost,
net of any accumulated depreciation and/or value allowances. Because of the
potential for understated values for the tangible assets the
book value of the company's assets is not an appropriate measure of the business's tangible asset value. The longer a particular asset is carried on the
books, the greater the potential for differences between book value and fair market value.
The value of a business enterprise that is expected to continue to operate into the future is knows as a "Going-Concern". The tangible asset value
of a going concern should be shown at fair market value as previously defined for a fair market appraisal or as a sub-component of a business fair market valuation.
For example, re-valuing the tangible assets of a business, such as the equipment, is an integral part of a business valuation.
This value differs from the Liquidation Value of a company's assets, because an ongoing operation has the ability
to continue to earn profit, while a liquidated company does not. Additionally, the Going-Concern Value is worked into the fair market value of a company and is
the main reason why the fair market value of a company tends to be higher than the fair market value of the tangible assets of the company. Going-Concern Value can be
particularly relevant to service firms, such as medical practices.
The American Medical Association refers to Going-Concern Value as "in–place value" and states the following relative to practice valuation:
"Some advisers give an in–place value to assets because they are assembled into a working system and they help to produce income. For example,
a physician may have purchased a piece of equipment for $10,000 and depreciated it over a period of five years at $2,000 per year. At the end
of those five years, when the physician decides to sell the practice, the balance sheet shows the value of the equipment as zero because it has
been written off in the intervening years. But to a buyer the equipment has value, because it is in place and functioning." This is why re-valuing the tangible assets
of a business is integral to the business valuation process.
Liquidation Value is the net amount of the company's physical assets that would be realized if the business is terminated and the assets are sold piecemeal.
These physical assets include the real estate, equipment, furniture, machinery, vehicles and inventory that a company owns. Intangible assets are not included in a company's Liquidation
Value. Intangible assets include a business's intellectual property, goodwill and brand recognition.
Liquidation Value is typically lower than Fair Market Value.
Liquidation Value may be either the result of a "Forced Liquidation" or an "Orderly Liquidation". A Forced Liquidation is the value at which the asset or assets are sold as quickly as possible, such as at an auction. An Orderly Liquidation is the value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received. Either value assumes
that the sale is consummated by a seller who is compelled to sell and assumes an exposure period which is less than market norm if a company were to be sold
rather than liquidated.
Also known as Replacement Cost, Replacement Value is the current cost to replace an asset of a company being valued with one of similar or equal value.
The Replacement Cost of a company's assets could be determined for such assets as buildings, equipment, furniture, machinery and vehicles, etc.
This cost is determined by the price paid for a new asset plus tax, shipping and installation. This cost can change depending on changes in Market Value.
Replacement Value is also referred to as the price that will have to be paid to replace an existing asset with a similar asset. Replacement Cost Insurance
can be purchased to protect and cover a company or individual from this type of cost or loss. Replacement Cost Insurance pays the full amount needed to replace the asset or property.
The gradual reduction of the asset value or depreciation is not taken into account for insurance purposes. It is designed so the policyholder
will not have to spend more money to get a similar new item. The insurance company does not pay for intangibles.
Note: Some information on this page was extracted from
Chapter One © 1995–2012 by National Association of Certified Valuators and Analysts (NACVA) and 2012.v1 - Used by Institute
of Business Appraisers with permission of NACVA for limited purpose of collaborative training