Fair Market Value of a Business
The fair market value of your business is important whether you are looking to grow your business or sell your company. Every business owner should know how much their company is worth today if it were to sell on the market.
While many business owners only care about the value when they put their business up for sale, it can dramatically impact long-term planning. Knowing the value of your business is helpful for strategic planning, succession planning, tax planning, among a variety of other purposes. Eventually, it can help the business owner obtain a higher selling price for their business.
When looking to know the value of your business, a qualified business appraiser is especially useful. The standard of value most often used to determine value is called fair market value, which will be described below. They use their professional judgment, experience, and analysis to determine the range of values.
Peak Business Valuation is a qualified and credible business appraiser in Utah. We have experience working with small business owners across the country helping them understand the fair market value of their business. This includes individuals looking to buy a company, sell a company, or grow a company.
What is fair market value?
The IRS Revenue Ruling 59-60 states that the fair market value of a business is the price at which a willing and able buyer and a willing and able seller would transact for the business. Considering it is an open and unrestricted market and neither party is under compulsion to buy or sell. Additionally, both parties need to have a reasonable knowledge of relevant facts.
How does a valuation expert calculate fair market value?
A valuation expert does an in-depth assessment of the business to determine the fair market value.
- First, the analyst collects business tax returns and financial statements. They then convert these to common-size statements.
- After this, the analyst analyzes the financial statements, conducts a ratio analysis, and makes any normalization adjustments.
- Using various valuation approaches, the expert determines the fair market value. A valuation expert typically uses more than one valuation approach to calculate the value.
- Last, the analyst averages or uses a weighted average of the valuation approach calculations to determine a fair market value range.
Why is fair market value a range?
The value of a business has a wide range. Depending on the buyer, one may value the business higher than the other. Below we discuss several value drivers that impact a valuation. Each of these adds value, but the worth of each may be different to each buyer. For more information, see our blog on Why Your Business Valuation is a Range of Values.
What factors influence fair market value?
There are several factors a valuation analyst considers when determining the value of a business. A few of these include:
- Nature and history of the business
- Industry and economic outlook
- Book value and current financials
- Company earning capacity
- Dividend payout capacity
- Intangible assets including goodwill both personal and enterprise
- Price of similar transactions
Depending on the purpose of the business appraisal, the valuation expert will determine how to value the business and what factors to consider.
While many business owners have an idea of what their company may be worth, many are merely guessing. This results in many businesses selling for less than what they are actually worth. As such, hiring a business appraiser is well worth the knowledge and expertise.
In addition, discovering the value of your business today can help you create a well-crafted plan for growth and the eventual sell or transfer of your business.
Peak Business Valuation in Utah is here to help small business owners across the United States with buying, selling, or growing a company. Through a quality business appraisal, you can understand the value of the company today and learn how to increase that value.Schedule Your Free Consultation Today!