4 THE ADA PRACTICAL GUIDE TO VALUING A PRACTICE or strategic implications resulting from a subjective relationship between an investor and a given investment. It differs in concept from fair market value, although investment value and market value indications may sometimes be similar. Intrinsic value is the real value. It differs from investment value in that it represents an analytical judgment of value based on the perceived characteristics inherent in the investment rather than from characteristics related to a particular investor. It is the analytical interpretation of value that does not consider dynamic market conditions. Figure 1.1 shows a typical relationship between intrinsic value and fair market value. While intrinsic value develops the pattern shown as somewhat stable performance, fair market value is seen oscillating above and below the intrinsic value line. This means that when fair market value is above intrinsic value, the asset is considered “overvalued” — the market is willing to pay more than the intrinsic value. Alternatively, a fair market value that swings below the intrinsic value line indicates an “undervalued” asset — the market is not willing to pay as much as the asset’s intrinsic value. An important point to keep in mind is that intrinsic value is an analytical opinion shared between other analysts while fair market value is an opinion share by many investors willing to purchase the asset. Book value is usually defined as the difference between the original cost of an asset and its current basis (adjusted for depreciation, recognized and realized changes in value, etc.). Net book value is defined as book value of an asset less any intangible assets or liabilities associated with the asset, such as depreciation and amortization. Liquidation value is generally defined as the net amount realized from sale if the business is terminated and the assets are sold piecemeal. In addition to the standards of value, an appraiser must consider the premise of value. The premise of value is an assumption as to how the business will operate in the future. For example, a business that will continue to operate in the future will generate more revenue than a business going through forced liquidation. FIGURE 1.1: INTRINSIC VALUE VS. FAIR MARKET VALUE