"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, and liabilities are generally recorded at face value. Because of the
potential for unrecorded intangible assets, understated values for the tangible assets, as well as unrecorded assets and liabilities,
book value of the company is not an appropriate measure of business value. The longer a particular asset or liability 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 intangible elements of
Going-Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems
and procedures in place" (IGBVT). A trained and assembled work force is an example of a Going-Concern. It is a valuable intangible asset for many
businesses because of the substantial costs involved with developing a new work force.
This value differs from the value of a liquidated company's assets, because an ongoing operation has the ability
to continue to earn profit, while a liquidated company does not. The Going-Concern Value is worked into the purchase price of a company, and is
the main reason why the purchase price of a company tends to be higher than the current value of the 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."
Liquidation Value is the net amount or value 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 equipment fixtures, inventory, machinery, real estate and vehicles 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 name & 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".
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. While an "Orderly Liquidation" allows time for the piecemeal sale of assets at their highest market value a "Forced Liquidation" is usually accomplished by auctioning off all the assets as a group within a very short time period. Consequently, with a "Forced Liquidation" the value received is usually significantly lower than with an "Orderly liquidation". Additionally, any costs to dispose of the assets under either type of sale must be deducted to arrive at the final liquidation value. If a company were to be sold rather than liquidated, both Liquidation Value and Intangible Assets would be considered to determine the company's Going-Concern Value. Value investors will look at the difference between a company's market capitalization and its Going-Concern Value to determine whether the company's stock is currently a good buy. Liquidation Value can also refer to the cash value of a single asset.
Also known as Replacement Cost, Replacement Value is the "Current Cost" to replace an asset of a company being valued with a new one of similar or equal value. The Replacement Cost asset of a company could be used for a building equipment, fixtures, furniture, machinery, vehicles, etc . 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.
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 and that 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