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Valuation of a Business (4)

What is Fair Market Value (FMV) of a Business
  "The Fair Market Value (FMV) is the most probable price that an asset should fetch in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgably, without compulsion and assuming the price is not affected by undue stimulus."

Implicit in this definition is the assumption that:

Buyer and Seller are typically motivated; Both parties are well informed or well advised, and acting in what they consider are their own best interests; A reasonable time is allowed for exposure in the open market; Settlement would be made if an actual sale occurs in terms of cash in local currency or in terms of financial arrange­ments compara­ble thereto; and the price represents the normal consideration for the asset sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

FMV appraisal is a suitable assessment method for "Going Concern" businesses. The 'premis' of a Going Concern business is of a business which will continue to operate indefinitely and will not go out of business and liquidate its assets. For this to happen, the business must be able to generate and/or raise enough resources to stay operational. If the business cannot generate enough revenue or raise (borrow) enough resources to remain operational then it is not a Going Concern business and would be better valued by another methodology.

FMV of a going concern business is based on the Appraiser's conclusion of a probable sales price if the business were to be hypothetically sold between hypothetical parties. (In addition to the businesses unique fundamentals, the Appraiser uses data from past sales within the “appropriate market” of comparable actual business sales to reach a supported conclusion. In other words, the subject business is assumed not to have actually been sold, rather, it is assumed (at least as of the effective date of the appraisal for purposes of the analysis) that title is retained. Title could eventually transfer but for purposes of the assignment, title is assumed to have been retained.

To substantiate a determination of FMV presented in the Appraisal Report, the Appraiser must base such an opinion on past comparable sales which exhibit the market characteristics as stipulated in the above definition of FMV in relation to the target business.

Getting access to data about the actual sales price of small business sales or sales of private companies that are ‘comparable’ with the target company is the difficult part as this data is not available in the public domain. There is ample data available about Public Companies from the Stock Markets but this is totally unsuitable because shares in a Public Company are considered a ‘liquid asset’ (ie. It is easily sold for cash) whereas shares in a Private Company or Sole Trader Business are not.

As a general rule Accountants, unless they are in the ‘business of selling businesses’, do not have access to this data as it is a statutory requirement in most states of Australia to hold a Real Estate Sales license to sell businesses which they generally do not have.

Business Brokers, who are required to be licensed, have (or have access to through their specific Industry Body) to vast quantities of comparable data on actual sales in their databases as well as being up to date with Market Sentiment at any point of time.
  Contributed by: Value a Private Company.com.au
  About the Author:
  Paul Nielsen is a graduate of Chicago’s Loyola University School of Business Administration and is a Certified Mergers and Acquisitions Advisor (CM&AA).

He holds qualifications in Australia as a Certified Practicing Business Broker (CPBB) from both the REIQ & AIBB, is a Certified Machinery & Equipment Appraiser (CMEA), Licensed Real Estate Agent, Licensed Second Hand Dealer and Accredited Sponsor of the Australian Small Scale Offerings Board.

Paul is a Fellow of the Institute of Directors & Managers (FIDM) and an Accredited Senior Business Analyst (SBA) with the International Society of Business Analysts.

For three successive terms Paul was the elected National President of the Australian Institute of Business Brokers (AIBB) and is an active Member of the Australian Institute of Company Directors. Operationally, Paul has served on the Boards of Publicly Listed and Private Companies as Chairman, Executive and Non Executive Director over a 38+ year period.

Paul lives in Brisbane, Australia and can be contacted on +61 7 3010 9711 or +61 408824122 or by Email at pauln@avantiacorp.com.au

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