Many terms are used to describe various notions of value; but, unfortunately, such terms mean different things to different people. As one experienced attorney put it:

Many terms are used to define value. … Only a few of these terms have some definition. Others have the definition which the parties choose to place upon them

Every appraisal report or engagement should identify and define the applicable standard of value.

The standard of value should be specified, such as “fair market value,” “fair value,” “investment value,” and so forth.

The most widely recognized and accepted standard of value is fair market value.

The general definition of fair market value is almost universally accepted as the cash, or cash-equivalent, price at which property would change hands between a willing buyer and a willing seller, both being adequately informed of the relevant facts and neither being compelled to buy or to sell.

In legal interpretations of fair market value, the willing buyer and willing seller are hypothetical persons dealing at arm’s length, rather than any “particular” buyer or seller. In other words, a price would not be considered representative of fair market value if influenced by special motivations not characteristic of a typical buyer or seller.

The concept of fair market value also assumes prevalent economic and market conditions at the date of the particular valuation.

The terms market value and cash value frequently are used interchangeably with the term fair market value.

The expression fair value is an example of ambiguous terminology used in the field of commercial appraisal. In order to understand what the expression means, it is necessary to know the context of its use. In New Zealand, the standard of fair value has its greatest application in valuations relating to relationship property and in particular to minority interests.

The concept of fair value is based on a desire to be fair and equitable to all parties.  A valuation of this nature recognises both the present and likely future relationship between the parties and, in the event of a sale, what one party is giving up and what the other is acquiring in value.  It is the value itself that in particular must be seen to be fair and also to be equitable between the identified parties to the transaction.

There is virtually universal consensus that the term investment value means a value based on expected earnings or monetary return to an investor. However, within that broad meaning, there are important differences in the perspective from which the concept is defined in different contexts. The income capitalization approach is typically used in market value appraisals of income-producing properties. The approach may also be used to estimate value, or the subjective value of property to a particular investor.

Market value and investment value may coincide when a client’s investment criteria are consistent with those that are typical in the market. In this case, the two value estimates may be numerically the same, but the two types of value are not interchangeable. Market value is objective, impersonal, and detached; investment value is subjective and personal. In estimating market value, an appraiser must be satisfied that all data and assumptions used in the income capitalization approach are market oriented.

Intrinsic value (sometimes called fundamental value) differs from investment value in that intrinsic value represents an analytical judgement of value based on the characteristics inherent in the investment, not tempered by characteristics peculiar to any particular investor.

The Handbook for Financial Decision Makers defines intrinsic value as follows: Value, intrinsic of common stock. The price that is justified for a share when the primary factors of value are considered. In other words, it is the real worth of the stock, as distinguished from the current market price of the stock. It is a subjective value in the sense that the analyst must apply his own individual background and skills to determine it, and estimates of intrinsic value will vary from one analyst to the next.

The concept of going-concern is not a standard of value but an assumption about the status of the business. It merely means that the business, practice, or property is being valued as a viable operating entity: It has its assets and inventory in place, its work force in place, and its doors open for business with no imminent threat of discontinuance as a going concern.

As noted earlier, fair market value, fair value, and investment value are examples of standards of value. Thus, in many instances, it would be correct to characterise the value being estimated as “fair market value on a going-concern basis,” “fair value on a going-concern basis,” or “investment value on a going-concern basis.”

In most cases, the term going-concern value, when used to value a business or business interest, is used to mean the total value of the entity as a going concern. Sometimes, however, if the total value of the firm on a going-concern basis exceeds the net value of its tangible assets, the term going-concern value is used to refer to the difference between the two, that is, to the intangible value that exists over and above the net tangible asset value.

Liquidation value is, in essence, the antithesis of going-concern value.

Liquidation value means the net amount that can be realized if the business is terminated and the assets sold off piecemeal. The term orderly liquidation means that the assets are sold over a reasonable period of time, attempting to get the best available price for each asset. The term forced liquidation means that the assets are sold as quickly as possible, frequently all at one time at an auction sale.

Book value is something of a misnomer because it does not represent any standard of value at all. It is an accounting term, not an appraisal term. Book value means the sum of the asset accounts, net of depreciation and amortization, less the liability accounts, as shown on a balance sheet.