Which Standard of Value Should You Use When Selling Your Business?

August 2007 Op-Ed Article

WHICH STANDARD OF VALUE SHOULD YOU USE WHEN SELLING YOUR BUSINESS?

When it comes time to sell your business, it’s important to realize that your business may be valued differently by different prospective buyers. Furthermore, it’s important to understand what standard of value will likely be used by a qualified business appraiser who is asked to perform an independent business valuation. There are many standards of value, such as book value, replacement value, insured value, assessed value, etc., each of which is applicable in its own specific circumstance.  The two standards of value that are particularly relevant when selling your business are: Fair Market Value and Investment Value.

Fair Market Value is the standard that most people are familiar with, and the legal standard used in most valuations. It relates closely to real estate appraisals performed by comparing a property to comparable
properties sold recently. However, by definition, fair market value is hypothetical, and is not swayed by what a particular interested buyer might pay, and may or may not be achieved if the business is transferred.

The definition of fair market value adopted by the professional appraisal community has as its foundation IRS Revenue Ruling 59-60, and is published by the American Society of Appraisers as: “The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.”

NOTE 1: The “amount” is always assumed to be cash without terms. Adjustments must be made for
the value if terms are involved. Investment Value on the other hand, represents the value to one particular interested buyer or investor. It is generally higher than fair market value.

RATIONALE: The buyer presumably has specific reasons for acquiring the property that motivate him to pay a premium over fair market value. Our goal when representing the seller is to find that particular interested buyer who might be willing to pay a reasonable premium over fair market value.

If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free consultation with us, have them contact me, or any of the M&A professionals at www.bradwaygroup.com

Mike Ertel, CBI, M&AMI
The Bradway Group
813.299.7862 Direct
ertel@bradwaygroup.com

© 2007, J. Michael Ertel, PA