Brief Definition
Premise of value is the underlying assumptions or conditions used to determine the value of an asset or business. It can vary depending on the context of the valuation and may include assumptions about the future of the business, the type of transaction, or the market conditions. The premise of value is important to define at the outset of a valuation engagement to ensure that all parties involved have a clear understanding of the underlying assumptions and conditions used to determine the value.
Further Explanation
Premise of value refers to the underlying assumptions or conditions that are used to determine the value of an asset or business. It is a key concept in valuation and is often used to define the purpose and scope of a valuation engagement.
The premise of value can vary depending on the specific circumstances and context of the valuation. For example, a business valuation might be conducted with a going concern premise of value, which assumes that the business will continue to operate as a viable enterprise in the future. Alternatively, a valuation might be conducted with a liquidation premise of value, which assumes that the assets of the business will be sold off in an orderly liquidation.
Other common premises of value include fair market value, which assumes that the transaction is between a willing buyer and a willing seller, both of whom are knowledgeable about the asset and are acting in their own best interests; and intrinsic value, which assumes that the value of the asset is based on its underlying fundamentals, such as its earnings potential or cash flow.
Overall, the premise of value is an important consideration in valuation, as it helps to define the purpose and scope of the valuation and can have a significant impact on the resulting value estimate. It is important to clearly define the premise of value at the outset of the valuation engagement to ensure that all parties involved have a clear understanding of the underlying assumptions and conditions used to determine the value of the asset or business.