Business Valuations Based Upon Fair Market Value
Horizon Business Group can assist you with valuing your business. Business valuations can be used for a variety of reasons:
- Estate and gift tax planning and filing
- Shareholder / partner buy-outs
- Credit and lending
- Establishment of measurement points and progress
- Sale of the business
- Numerous other reasons
Fair Market Value is the amount in cash or cash equivalents at which a 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.
Valuations must be performed by someone independent of the business being valued. This is important so the user of the valuation can fee confident that the valuation was made by someone who is not biased in the results of the valuation. Horizon Business Group routinely offers this service to clients whom we are not in the process of actually selling their business as a broker. Since we are receiving a commission based upon the sale price, we would not be considered “independent” in that situation. In almost all other situations, HBG should be viewed as independent and able to issue a written valuation report.
Estimates of Value for the Purpose of Selling a Business
Horizon Business Group provides an estimate of value for every business in which we are involved in the sale. That value may differ from a formal valuation report issued for other reasons. Here is the reason for the difference.
A business valuation is a hypothetical value based upon given or pre-defined circumstances at a certain date. Business valuations are based upon Fair Market Value, the definition shown above. Notice several key points in that definition. First, is the value in “cash and cash equivalents”. More often than not, an actual business sale transaction may have terms which are not strictly in “cash or cash equivalents”. Secondly, note the phrase “neither is acting under compulsion”. Every real life transaction involves some compulsion, greater or lesser, on the part of both the buyer and the seller. That simply means that both parties have some “reason” for “wanting” to enter into the transaction.
Contrast the definition of Fair Market Value with the definition of Most Probable Sale Price.
Most Probable Selling Price is that price for the assets intended for sale which represents the total consideration most likely to be established between a buyer and seller considering compulsion on the part of either buyer or seller, and potential financial, strategic, or non-financial benefits to seller and probable buyers. (Emphasis added).
Both the buyer and seller have reasons and synergies to cause them to want to enter into a transaction. This is the value which Horizon Business Group seeks to achieve in a business transaction. This is the value which recognizes and provides the greatest benefits to each of the parties to a transaction.