The selection of valuation methods and procedures depends on clarifying the asset, property, or business interest to be appraised. Ambiguity regarding the subject of valuation often leads to confusion and conflicting opinions among appraisers/valuers.

Business Entity

When dealing with an incorporated entity, it's important to be able to identify the entity using trade registrations to differentiate entities with similar business names. The geographic presence of the country make it subject to different laws and may affect the value of a specific business interest.

If business is not incorporated entity but some other form or structure, the form as well as the name must be specified. Some of the most common forms of business organization are sole proprietorships, general and limited liability partnerships, and cooperatives. The entity’s structure gives rise to special legal or tax considerations, and may have different implications on the interest being valued.

Specific Business Interest

There are two main inquiries when defining a particular business interest: Should the valuation be of assets or securities? If so, which assets or securities require valuation?

In the context mentioned above, "securities" refers to ownership interests like securities, debts, and partnership interests, rather than the direct ownership of the underlying assets of the business entity in question.

Assets versus Securities.

Equity interest implies an indirect ownership stake in a business, including all its assets and liabilities, both present, and potential. Direct ownership of assets and obligations is distinct from security or partnership ownership. In case of valuing security or partnership interest, it must be specified in the appraisal assignment. Similarly, for asset valuation, the specific assets and assumed liabilities must be identified. The analysis of security or partnership interest vs. business assets involves tax, legal, and financial factors that can affect the valuation considerably.

Equity Interests.

When valuing a partial interest in an entity, it is crucial to consider its proportionate relationship to the whole. If the entity has multiple classes of security, the appraisal assignment should specify the class being appraised. If only a part of the entity (like a division or branch) is to be appraised, it's important to clearly state which aspects are included in the appraisal.

Equity or Invested Capital.

Until it is determined which elements of equity and debt are included, the term "value of the business" remains ambiguous. In a corporation, equity refers to ownership represented by security, but if there are multiple classes of security, the combined value of all classes is typically referred to as equity. A statement specifying which class of equity is represented should be included for multiclass capital structures. In a partnership, equity is represented by partners' capital, and for multiclass partnerships, a statement specifying the represented class or classes of partnership interests is necessary. In a sole proprietorship, equity refers to the owner's interest.

Invested capital's definition is not always clear, and a definition should be provided in the valuation context. Invested capital usually refers to all equity and interest-bearing debt, short or long-term, but some analysts only include long-term debt. Investment bankers may exclude a company's cash when assessing invested capital's value. To avoid confusion, it is essential to define precisely what is and is not included in the valuation.

Enterprise Value.

Unfortunately, the term enterprise value is used very casually in business valuations. It is generally used to represent some sort of aggregate value of the company and often used for market value of invested capital (MVIC). However, enterprise value could mean aggregate value of minority stock, value of either all common equity or all equity on a control basis, value of all invested capital, value of some portion (or all) of the assets, or something else.

Thus, users of valuation appraisal report is referred to enterprise value, it is best not to assume any definition, but to make an attempt to identify the definition intended by the appraiser / valuer. It is important that valuer should also spell out the intended definition of enterprise value.

To accurately appraise a business, it is important to define the entity and its specific business interest. The specific business interest should be defined by determining whether the valuation is of assets or securities and identifying which assets or securities are to be valued. In the case of a partial interest in an entity, the proportionate relationship of the partial interest to the whole is important, and if there is more than one class of security or partnership interest, the class being appraised must be stated. Equity means the ownership interest, and invested capital should be clearly defined. Enterprise value is a term that is often used ambiguously, so its meaning should be carefully defined in the given valuation context.