A distinction between deep value and surface value. Deep value is independent of market price.

The term "investment value" refers to the concept of pure, true, intrinsic, economic value. 

• The phrase "expected investment value" refers to investment value adjusted for risk and uncertainty. 
• Economic valuation is the estimation of economic value.

Even with all these qualifying adjectives to clarify the meaning, the phrase is awkward and remains ambiguous. A less ambiguous distinction is between deep value and surface value. 


Deep value is investment value based primarily on intrinsic economic value estimated from expected future discounted cash flows and buttressed by accounting book value, quality and other aspects of value independent of market price. 

• Deep intrinsic value can include qualitative factors such as brand recognition, franchise, corporate governance, labor relations, government contracts and assets that are not usually marked to market. 
• A corporate governance score such as Standard & Poor's CGS [PDF or HTML] use criteria that may be indicators of long-term value creation, including both a Corporate Governance Score for a company and a separate Country Governance Classification for its country of origin. 
• The criteria are fairness, transparency, accountability and responsibility, as elaborated in Standard & Poor's Corporate Governance Scores: Criteria, Methodology and Definitions, July, 2002. 

Surface value is a misnomer -- it is not really value but rather market price, usually expressed as a ratio either with accounting items such as earnings, dividends, net worth, and sales, or with growth rate. 

• Surface value is analogous to unit pricing of fungible commodities by number, by volume, and by weight, for comparison shopping without regard to quality.

http://www.numeraire.com/value.htm

Main principles of business valuation

The concept of value and some of the main principles of business valuation.

1.  Value differs from price

"Price is what you pay.  Value is what you get."  Buffett once said.

But, only if you do your homework.

Getting to the right price in any deal involves understanding what business assets are truly worth and then structuring a deal around financing and tax realities.

2.  Planning drives value

Creating value involves business planning and execution.

Creating value - long term growth in asset value in a company you've built - is something you need to focus on, because a company is the sum of real and tangible assets, investments, ideas and management talent.

If you can look at all those working parts of a business through the prism of value, the desire to determine and create value in a company can become a much more important driving force in its growth than simple profits and losses.


3.  No two valuations are exactly alike

No two businesses are exactly alike; neither are the goals and circumstances of business owners.

Valuation isn't an exact science for another reason as well:  "The risk inherent in any business situation is far from static.  Depending on the economy and the state of the industry the business operates in, the company may be under tremendous prssure to stay afloat, or it may have great opportunities for growth.  Any time the economy goes through a major convulsion, people take a fresh look at what value means and at the realities of any deal.  In 2008, US was in the grip of a worldwide credit crisis - an economic slowdown that is redefining the values of a host of assets, from companies to private homes.

Proper business valuation takes a lot of practice.  People with finance degrees and long experience in accounting or other numbers-related fields aren't always natural at valuation, either. You should learn the ins and outs of business valuation and know the areas in which you can handle valuation on your own - and those for which you should hire some help.

4.  Valuation isn't a one-time deal

Most tax, business, and personal finance experts say that even if you're years away from retirement - or years away from your next business idea - keeping your valuation numbers current is a good idea.  This way, you can make changes and investments in the business so you can leave the business with the highest valuation possible.

How often should you run valuation numbers?  It varies based on need. 

If you're working with a business or tax planner, discuss the creation of a valuation system for your business, whether it's something you access yourself or have an expert handle at regular intervals.

Ten Signs of Value

Ten Signs of Value

Looking at five tangible signs of value

Steady or increasing return on equity (ROE)
Strong and growing profitability
Improving productivity
Producer, not consumer, of capital
The right valuation ratios

Understanding five intangible signs of value

A franchise
Price control
Market leadership
Candid management
Customer care

Ten Signs of Unvalue

Ten Signs of Unvalue

Looking at five tangible signs of unvalue

Deteriorating margins
Receivables or inventory growth outpacing sales
Poor earnings quality
Inconsistent results
Good business, but stocks is too expensive

Considering five intangible signs of unvalue

Acquisition addiction
On the discount rack
Losing market share
Can't control cost structure
Management in hiding