Before the calculation, define the question
“What is the business worth?” appears straightforward. Yet the question is incomplete without understanding why the valuation is required, what interest is being valued, the relevant date, and who will use the conclusion. International Valuation Standards identify these matters as fundamental components of the scope of work.
A proposed acquisition, financial reporting requirement, and shareholder dispute may concern the same business, but they do not necessarily ask the same valuation question. Before selecting a method or building a financial model, the engagement must establish the decision or requirement the valuation is intended to address.
Purpose does not mean tailoring the conclusion to a preferred outcome. It means defining the assignment correctly so that the analysis answers the relevant question.
1. Intended use establishes the scope
The scope of work translates the valuation requirement into an agreed analytical assignment. It identifies the subject of the valuation, intended use and users, valuation date, basis of value, and relevant limitations. Under International Valuation Standards, the scope must be appropriate for the intended use.
At the outset, the engagement should resolve several questions:
What asset, liability, business, or ownership interest is being valued?
Why is the valuation required?
Who are the intended users?
At what date must value be assessed?
Which valuation basis and applicable requirements govern the assignment?
What information, investigations, and limitations will the work involve?
These questions establish the boundaries within which the conclusion can be understood and used.
2. Purpose informs the basis of value
The basis of value defines the fundamental measurement assumptions underlying the valuation. It should not be confused with the valuation method: the basis establishes what is being measured, while the method provides a means of estimating it. International Valuation Standards require the adopted basis to be appropriate for the intended use.
Financial reporting provides a clear example. Where IFRS 13 applies, fair value is a market-based measurement: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is not a measurement based solely on the reporting entityʼs own intentions.
Consequently, an assumption that is commercially relevant to a particular investor does not automatically belong in a financial reporting fair value measurement. The analysis must consider whether market participants would use that assumption when pricing the asset or liability.
3. The valuation date anchors the analysis
A valuation conclusion relates to a specified point in time. That date may differ from the date on which the report is completed or issued, and the distinction should be explicit.
This matters because measurement conditions are date-specific. Under IFRS 13, for example, fair value reflects market conditions at the measurement date and the assumptions market participants would use at that time. A subsequent report date does not change the date to which the measurement applies.
The valuation date should therefore be established before the analytical work begins, rather than treated as a reporting detail added at the end.
4. A practical illustration: one business, different questions
Consider a hypothetical business being assessed for a proposed acquisition and, separately, for a financial reporting fair value measurement.
Consideration | Acquisition assessment | IFRS 13 fair value measurement |
Central question | What does the investment represent economically for the proposed buyer? | What price would market participants pay in an orderly transaction at the measurement date? |
Buyer-specific benefits | May be examined separately within the buyer’s investment case | Included only to the extent consistent with market-participant assumptions |
Analytical presentation | Distinguish the underlying valuation from buyer-specific scenarios | Explain the measurement using the applicable market-participant framework |
The financial reporting column follows IFRS 13ʼs market-based measurement principle; the acquisition column illustrates a proposed investment-analysis framework.
The distinction does not require different methods in every case, nor does it imply that the resulting figures must differ. It requires the assumptions and conclusions to be interpreted within the question each exercise addresses.
5. Reporting must preserve the context
The report should explain more than the final number. IVSCʼs reporting guidance identifies intended use, intended users, valuation date, basis of value, methods, significant inputs, assumptions, and the rationale for the conclusion among the matters to communicate.
This context enables readers to understand what the conclusion represents—and what it does not. A valuation prepared for one purpose should not be assumed suitable for another without reviewing its scope, assumptions, and limitations. International Valuation Standards expressly address the importance of preventing valuation advice from being used outside its intended context.
For example, before reusing an existing report, a client should ask whether the subject interest, valuation date, measurement basis, intended users, and applicable requirements remain appropriate.
Closing perspective
A well-defined purpose is the starting point for a credible valuation. It connects the commercial or reporting requirement with the scope, measurement basis, evidence, and communication of the conclusion.[1]
The first step is therefore not to select a multiple or discount rate. It is to establish precisely what must be valued, for whom, at what date, and for what use.