When I was about ten, I built myself a billy cart. I had pram wheels, timber and rope, and I was determined to do it without help. I raided my father’s toolbox for nails and his saw, but I couldn’t find a hammer. What I could find was his hand plane. Near enough was good enough.
I built the cart and towed my little brother around the garden, quite proud of myself. My father was less impressed. His plane, it turned out, was not a hammer, and that plane now looked like it had lost a fight. He taught me a lesson I still carry: use the right tool for the job.
I was reminded of that lesson recently by a client, before we’d even agreed to work together. He and his wife had two questions. The first was whether there was room to move on my fee — fair enough, and worth a conversation. The second, he said, had been put to him by someone else whose opinion he trusted: what standard of value would I be applying? Market value, fair value, or another basis?
That is exactly the right question, asked in exactly the right words. Most people never get there, not because they’re careless, but because nobody tells them there’s more than one correct answer to “what’s it worth.” He’d clearly been well advised, and he deserved a straight answer.
The right question, and the one hiding behind it
Standard of value — sometimes called basis of value — is about which yardstick applies to the job. Market value assumes an open-market sale between a willing buyer and a willing seller, neither under any pressure to deal. Fair value assumes something different again, and investment value different again still. Which one applies depends on for whom and why the valuation is being done, and it’s a genuine, specialist decision. My client asked about it, and got a clear answer suited to his purpose.
But answering that question properly doesn’t protect you from a second one, and this is the one that trips up almost everyone, including people sharp enough to have asked the first: once you’ve settled on the right yardstick, what exactly are you measuring it against? The whole business? Or the slice of it that’s actually yours?
The business isn’t the same as your share of it
Think of a house with a mortgage on it. An agent tells you the house is worth $900,000. That is not what lands in your bank account if you sell. First the bank gets its $500,000 back. Then, if you’d borrowed $50,000 from your parents for the deposit and still owe it, they get that too. What’s left over is yours. The $900,000 headline figure and the amount you actually pocket are two very different numbers, and confusing them would be an expensive mistake.
A business works the same way, just with many more moving parts. There are three figures worth knowing, and they are not interchangeable:
- Operating value — what the core business itself is worth, stripped of debt, spare cash, and anything not needed to run it day to day.
- Enterprise value — operating value plus the extras sitting inside the business that aren’t part of running it: an investment property, surplus cash, a boat bought through the company.
- Equity value — enterprise value minus what’s owed to the bank and other lenders, plus or minus any loans between the business and its owners. This is the only one of the three that tells you what you, the shareholder, actually walk away with.
Most of the tools people reach for — market multiples, discounted cash flow, a rule of thumb from Google or an AI chatbot — are built to price the operating business, or something close to enterprise value. They are not built to tell you what you personally are worth. Getting from one to the other takes deliberate work: adding back surplus cash, separating out assets that don’t belong to the operating business, deducting debt, and reconciling what the business owes its owners, or vice versa. Skip any one of those steps, and what you’re left with is enterprise value dressed up as equity value.
In a property settlement, a shareholder exit or a business sale, that gap is rarely small. It can run to hundreds of thousands of dollars. And a report that doesn’t build the bridge properly won’t hold up if an opposing expert, a court, or a fellow shareholder asks that second question.
Two questions to ask before you believe a number
If you’re already switched on enough to ask about standard of value, you’re ahead of most people — well done. But ask the second question too: is that figure for the business, the whole enterprise or your actual share of the equity in it once everything else is settled? If your adviser can answer the first question but not the second, it’s worth wondering what else they’ve missed.
