Business owners often have questions about company valuation issues and one of the questions which often get asked is, “What exactly is fair market value?”
Fair market value of a business can be defined as the monetary value at which the business would exchange ownership between a willing buyer and a willing seller, neither being under compulsion to buy or sell and each having reasonable knowledge of the relevant facts.
In normal business terms fair market value is the value someone like a third party unrelated investor would use to evaluate how much the Business is worth when they have reasonable knowledge about the industry and how the business is run.
Fair market value can be determined by analysing the historical and projected cash flows of the business. Future cash flows are then discounted back to the present value. It also takes into consideration the assets and liabilities as well as the potential growth of the industry or economy.
Other Specific Factors
Any other factors specific to the business are also taken into account. The value could be discounted for:
- Lack of control
- Size of the business; and
- Lack of marketability depending on the situation.
Fair market value is a term business valuation experts use in their reports and refers to the value of a business on the open market.
Here are some reasons, why a business should identify their fair market value.
Change in business structure
Over time a business may need to change its business structure. Determining the fair market value of the Business may be a requirement of the Australian Taxation Office prior to the assets being transferred to another entity.
Disputes and Legal Proceedings
In legal disputes there is often a requirement to obtain an assessment of fair market value. Typically fair market value valuation reports are required in family law/divorce, partnership disputes, shareholder disputes and inheritance disputes.
Long Term Planning
Fair market value is a useful metric which can be applied in the long-term planning of a business. For instance businesses involved with succession planning can transfer shares to a related party or employee. The starting point for succession planning is to find out what the business is currently worth.
After identifying a successor the next step is to find out the buy-out value of the business. Parents looking for children to take over the business may be relying on the family business to fund their retirement.
The children may have different ideas about where they want to take the business. A succession plan helps align the family interest and avoids conflict.
The valuation of a business can change substantially in relatively short periods of time. Working out the fair market value helps in making appropriate long-term plans relating to transfers, divisions, and consolidations.
Are you looking for a professional business valuation provider to help you identify the fair market value of your business? One of Australia’s top business valuation firms, Rushmore Group is renowned for providing business appraisal services for more than 10 years and offers assistance for both large and small business valuations. If you’re looking to get a business valued please call us on (1800) 454 622 today for more details.