The definitions of value

”Value” is a slippery concept. In the business world it has two important implications. First, it refers to what something is worth in economic terms. Second, values are something that are important to both companies and people. PwC’s values are act with integrity, care, make a difference, work together and reimagine the possible but as a company and a business PwC Finland is also worth some number of euros.

Luckily enough, valuation only refers to the first implication and a handy thing to keep in mind is that companies and people often have multiple values so when you hear the plural values, it very likely refers to the second implication. Unfortunately companies and businesses can also be worth different numbers of euros at the same time. This is because value is in the eye of the beholder and businesses are worth different amounts to different parties. There are different bases of value that are dependent on the perspective taken.

Now, before looking at more detail on different bases, it is worth stating that economic value rests on cash flows. The cash flows can be uncertain or even improbable and they might occur far in the future but without expected cash flows there is no value.

The most common basis of value is fair value. For businesses it usually refers to the price that could be gotten for the business if it were offered for sale to all, or at least most of, interested parties. The value for the current owner of the business, the value in use, could differ from fair value by quite a bit. For example, if the competition authorities have required that the buyer sell a part of an acquired company or face large fines, the value in use for that part is low but it could hopefully be sold for a nice sum of money so the fair value could be higher.

The part of the business to be sold due to competition issues could be worth a lot more than fair value to a certain buyer, perhaps due to synergies with their existing business. The synergistic value would be high. A careful analysis of fair value should consider the synergies for buyers and take into account whether they could be forced to pay for those synergies in which case the fair value would be equal to that synergistic value.

I will stop here with the different bases of value but there are more (such as liquidation value, replacement value, market value and book value)  and confusingly the different bases of value which mean the same, or at least nearly the same, thing have different names attached to them.

Why is this important? When someone states that ”the value of this business is x number of euros as of this date”, you should be asking yourself (or perhaps the valuer) what is the basis of value that she or he refers to. Also, when someone asks you to value something, you should be asking what the valuation is for and from which perspective the valuation should be conducted. Fair value is the price for which an asset could be sold between knowledgeable market participants. For businesses this usually means the price that would most likely be gotten on the market if the business were to be sold and offered to all, or at least most of, the interested parties to get the best price.